Late last month, the IRS began sending letters to over 10,000 cryptocurrency investors warning them that they may owe taxes on their crypto gains. Whether you received a letter or not, you should be aware that cryptocurrency tax compliance is currently a top priority for the IRS.
In fact, the chief of the IRS’s criminal division has said that cryptocurrencies are a “significant threat” to tax collection. He indicated that the IRS plans to begin pursuing criminal tax evasion cases against those who refuse to pony up.
As you may know, the IRS has won a lawsuit requiring Coinbase, a digital currency exchange, to pass along data on any customers who purchased or sold at least $20,000 in digital currency anytime between 2013 and 2015.
According to Bloomberg News, the IRS sent two different types of letters to people it suspects of hiding untaxed cryptocurrency gains. The first merely informed the taxpayer that they may owe taxes on their cryptocurrency gains and urges them to file an amended or delinquent return. This style of letter was likely sent to people who likely had relatively innocent explanations for failing to report. For example, they may be parents of children who traded in cryptocurrencies without their knowledge.
The second type of letter was much more threatening. It gave a deadline by which the taxpayer must respond under oath and in writing. The IRS is seeking all relevant information about cryptocurrency investments between 2013 and 2017. It also notifies taxpayers that their information will be cross-checked against data the IRS receives from banks, financial advisors and other sources.
Quick info on how cryptocurrencies are taxed
The IRS considers cryptocurrencies to be property, not currency. They are taxable as capital gains. That said, the use of blockchain technology makes accounting a challenge. Essentially, the investor needs to keep a ledger of every purchase and sale and use that to calculate overall gains or losses.
The agency requires all cryptocurrency sales to be reported — even those that produced a loss. People who are holding their cryptocurrency without selling it are generally not required to report it.
What to do if you haven’t filed
Whether you received an IRS letter or not, if you have a lot of unreported cryptocurrency transactions you should talk to a tax lawyer immediately. Do not simply amend your return, as this could be considered an admission that you broke the law.