IRS Issues Another Round of “Educational Letters” to Cryptocurrency HoldersArticles/News, Hot Topics
Posted on August 31, 2020 | Share
Last summer, we reported on the Internal Revenue Service’s (IRS) issuance of more than 10,000 “educational letters” to U.S. taxpayers who were suspected of underreporting and underpaying their federal income tax liability with respect to their cryptocurrency holdings. On August 14, 2020, the IRS sent another round of letters to cryptocurrency investors in Massachusetts and across the United States. If you received one of these letters, you will need to review the letter carefully, and it will be important for you to speak with a Boston IRS tax lawyer promptly.
Why is the IRS Sending “Educational Letters” to Cryptocurrency Holders?
The IRS has identified cryptocurrency tax fraud as one of its top enforcement priorities. It is believed that many cryptocurrency investors do not accurately report their federal income tax liability with regard to cryptocurrency mining and transactions, and that many do not report their cryptocurrency-related activities at all.
While the IRS refers to its notices as “educational letters,” the letters are not merely being sent for informational purposes. Taxpayers who receive notices from the IRS have an affirmative obligation to determine whether they have underreported or underpaid their federal income tax liability; and, in some cases, they have an obligation to respond to the IRS’s letter directly. If a U.S. taxpayer fails to report and pay all tax due after receiving a letter from the IRS, the consequences can be far greater as a result of being placed “on notice” with respect to potential federal tax law violations.
When Do Cryptocurrency Holders Need to Pay Federal Income Tax?
The Internal Revenue Code was enacted long before the concept of cryptocurrency was invented. As a result, U.S. tax laws are not well-suited imposing tax liability for cryptocurrency mining and transactions. Nonetheless, the IRS has clearly stated its intent to tax virtually all types of activity involving cryptocurrency, from mining and investing to buying and selling goods and services.
The IRS classifies cryptocurrency as property; and, as such, transactions involving cryptocurrency can trigger either ordinary income or capital gains tax liability. Gain or loss must be calculated on a transaction-by-transaction basis, taking into account the fair market value of the cryptocurrency at the time of its acquisition and disposition.
What if You Received Letter 6173, Letter 6174 or Letter 6174-A?
If you have received Letter 6173, Letter 6174 or Letter 6174-A from the IRS, you will need to work with a tax attorney to determine your next steps. If you received Letter 6173, you must respond or request an extension by the deadline stated in the letter. But, regardless of which letter you received, you must determine if you owe outstanding reporting or payment obligations to the IRS; and, if you do, you will need to rely on the advice of counsel in submitting the necessary filings to the IRS.
Speak with Boston IRS Tax Lawyer Kevin E. Thorn about Your Cryptocurrency Tax Obligations
For more information about complying with federal tax law with respect to your cryptocurrency holdings, schedule a confidential consultation at Thorn Law Group. To speak with Boston IRS tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, call 617-692-2989, email firstname.lastname@example.org or inquire online today.