Update: August 25, 2020
It appears the IRS is sending another round of cryptocurrency warning letters for 2020. Several clients have called us recently after receiving one of these letters from the IRS dated August 14, 2020.
If you’ve received an IRS crypto letter, read on to see your next steps, or call us to schedule a confidential consultation with a crypto tax attorney.
See also: The new IRS crypto question on Form 1040
Original article: July 30, 2019
Last week, we blogged about an IRS notice — Letter 6174-A — distributed to people the agency suspects of improperly reporting digital currency gains. This week, we have more information. Specifically, our crypto tax team has learned that the IRS mailed three different letters. So let’s break each one down and review “next steps” for taxpayers who got one.
Andrew Gordon, President of Gordon Law Group, discussed the IRS crypto letters on a webinar with ZenLedger.
Overview of IRS Letters 6174, 6174-A, and 6173: Are they “Soft Notices”?
Based on what we hear through our connections, the IRS sent out about 13,000 of these crypto back tax letters. We don’t have a breakdown, yet, of how many people got each version.
Some reports refer to the trio of letters as “soft notices,” meaning that voluntary compliance is all that’s required, and the IRS won’t follow up. However, from what we’ve seen, only one of the three is a true soft notice, Letter 6174.
The Three Cryptocurrency Non-Compliance Notices
As we’ve mentioned, the IRS sent out three letters: 6174, 6174-A, and 6173. Let’s take a closer look at each.
IRS Letter 6174
Letter 6174 is the actual “soft notice.” In it, the IRS explains it has reason to believe that you might need to report back crypto gains. What makes this classification different than the others is that the IRS says it will not be following up with these people. If, however, you did enjoy crypto gains and fail to amend your taxes, despite receiving this letter, you’ll likely find yourself in more trouble down the line if you continue on a non-compliant path.
IRS Letter 6174-A
Very similar to 6174, Letter 6174-A explains that recipients aren’t required to respond to the letter, but need to report any back crypto gains ASAP. The difference between this letter and 6174 is that the IRS floats the possibility of following up with future enforcement actions. In other words, Letter 6174-A recipients have been put on notice, and need to handle their back crypto gains immediately.
IRS Letter 6173
If you got IRS Letter 6173, get in touch with a cryptocurrency tax lawyer as soon as possible. Like the other two notices, it indicates that the IRS has information regarding a failure to report digital currency gains.
However, unlike the other two, this letter requires a response and says the IRS WILL be following up to make sure you’ve complied. (In IRS-speak, “follow up” typically means an audit or an investigation.) To put it another way: They are watching you closely, so get it done.
What to do if you didn’t report crypto on your returns
If you did not report your crypto trades on your tax returns and you received one of these letters, you are at high risk of audit! The IRS likely sent these letters because they have information that you had crypto transactions. Each trade, purchase, and exchange is taxable and needs to be reported – even if you have a loss!
Do I need to report even if I have a loss?
Yes! You are required to report crypto trades even if you have an overall loss. The IRS requires you to report each trade separately on Schedule D and Form 8949. If you have a loss, it will be to your benefit to disclose. If you don’t disclose, the IRS may not know that you have a loss and they may assume you have a gain. Many exchanges are only reporting sale and proceed amounts, not cost basis. It is on you, the taxpayer, to prove and report your tax basis!
What if I reported my crypto and still received a letter?
Consider the letter a warning and an opportunity to make sure your reporting is accurate! If you reported crypto, but may not have taken the right position on subjects such as like-kind exchanges, forks and airdrops, mining, or other crypto tax questions – now is the time to get a professional to properly file. It is a lot cheaper to have a tax attorney review your tax returns (and make amendments if necessary) than to go through an audit.
Connect with a Cryptocurrency Tax Attorney Today to Start Preparing Your Response to IRS Letters 6173 and 6174-A
Have you received an IRS crypto tax letter? Regardless if you received the soft notice or one of the others, now is the time to get your digital currency tax house in order. We can help.
Our team of crypto tax accountants and attorneys knows how to keep you compliant while keeping the most amount of money in your pocket. Give us a call today. Let’s start talking about how to best position your crypto holdings and respond to the IRS.
The Gordon Law Group is based in Chicago, Illinois, but works with US taxpayers across the United States, Canada, Europe, Australia, and Asia.
