IRS is Sending Out Thousands More Cryptocurrency Warning Letters
The IRS has begun sending out warning and action letters to suspected cryptocurrency holders similar to the 10,000+ letters they sent at this time last year (August 2019). Letters 6174 and 6173 are two different variations that alert suspected crypto holders of their tax reporting requirements.
The below images have been taken from reddit over the past week. As seen, a number of individuals are receiving variations of these letters.
6174 Cryptocurrency Letter
The variations of letter 6174 are no action letters, meaning they do not require a response. If you have met all the crypto tax filing obligations outlined in the letter, you have nothing to worry about. The letters are simply designed to educate the recipient.
If you have not met all of your filing requirements, you should do so and amend any prior years tax returns that did not include your crypto-related gains, losses, and income.
6173 Cryptocurrency Letter
Letter 6173 is more serious, and it requires a response. You are required to respond to the letter by the date specified within. If you do not respond to the letter, your tax account will be examined by the IRS.
If you received Letter 6173, you have some options for responding:
- Properly file the missing tax returning including your virtual currency transactions
- Amend your prior years tax return if you did not properly report your cryptocurrency transactions
- Or, if you believe you filed your cryptocurrency taxes correctly, respond to the IRS with a written letter explaining how you arrived at the income reported
Crypto Taxes Overview
The IRS treats cryptocurrencies as property for tax purposes, not as currency. Just like other forms of property—stocks, bonds, real estate—you incur a tax reporting requirement when you sell, trade, or otherwise dispose of your cryptocurrency for more or less than you acquired it for.
For example, if you purchased 0.1 bitcoin for $2,000 in June of 2020 and then sold it two months later for $3,000, you would have a $1,000 capital gain. This gain needs to be reported on your tax return, and depending on what tax bracket you fall under, you pay a certain percentage of tax on the gain. Rates fluctuate based on your tax bracket as well as depending on whether it was a short term vs. a long term gain. This applies for all cryptocurrencies.
Alternatively, if you sold your cryptocurrency for less than you acquired it for, you can write off that capital loss to save money on your crypto taxes.
We discuss the detailed mechanics of crypto taxes in our blog post, The Complete Guide to Cryptocurrency Taxes.
Cryptocurrency Tax Software
CryptoTrader.Tax is a cryptocurrency tax software platform built to automate the entire crypto tax reporting process. Tens of thousands of crypto and bitcoin investors from all over the world use the platform today to handle their tax reporting.
By integrating with major exchanges and platforms, CryptoTrader.Tax allows users to import their historical transactions directly into their account. Once this data is imported, users can generate capital gains and losses reports as well as an auto-filled Form 8949 with the click of a button.
The tax reports that CryptoTrader.Tax generates are based off your historical data and can be taken to your tax professional or imported directly into your preferred tax filing software like TurboTax or TaxAct.
You can import all of your transactions and get a preview of your capital gains and losses completely for free with CryptoTrader.Tax. Learn more about how it works here.
Disclaimer: This guide is provided for informational purposes only. It is not intended to substitute tax, audit, accounting, investment, financial, nor legal advice.