IRS issuing a series of urgent letters to over 10,000 taxpayers regarding their virtual currency transactions.
The IRS started sending out letters mid-July to taxpayers who have participated in virtual currency transactions. The letters consist of three different versions: Letter 6174, Letter 6174-A, and Letter 6173. Each letter's intention, according to the IRS, is to "strive to help taxpayers understand their tax and filing obligations and how to correct past errors." But each letter sends a different message. While Letters 6174 and 6174-A can be considered "soft" notices, Letter 6173 alleges noncompliance by stating that you "may not have met your U.S. tax filing and reporting requirements for transactions involving virtual currency..." IRS Commissioner Chuck Rettig recently stated:
"Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties. The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations."
By the end of August, it is estimated that more than 10,000 taxpayers will have received one of these letters.
According to IRS Notice 2014-21, the IRS states that virtual currency "is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value." The IRS also states that virtual currency may be used to pay for goods, services, or held for investment purposes. Virtual currency which has the same value of real currency and has the ability to be substituted for real currency is called "convertible" virtual currency. A well-known "convertible" virtual currency is Bitcoin.
One source the IRS may have used to obtain taxpayer information regarding their virtual currency accounts is through a summons the IRS issued to Coinbase. Coinbase is a digital currency exchange company with its home office in San Francisco, California. However, when an IRS spokesperson was asked whether the letters were a result of the Coinbase summons, they declined to answer. On February 23, 2018, Coinbase sent a notice to 13,000 of its customers that it planned to comply with the court order and turn over around 13,000 customers' data within 21 days. The Coinbase customers who were affected by this were users who had completed transactions of more than $20,000 through their accounts in a single year between 2013 and 2015.
Knowing what transactions to report to the IRS can be a daunting task for any taxpayer. Though the IRS has given some guidance with Notice 2014-21 on what is reportable, a taxpayer who is not familiar with the Internal Revenue Code may have trouble understanding what rules apply to them. At The Wilson Firm, we strive to be at the forefront of new technology and the tax consequences that follow. We help navigate our clients with complicated issues like this. While there are a number of ways to handle any single case, taxpayers should know that they will be much better off seeking legal assistance in order to try and resolve these matters rather than let the situation get out of hand.
