In recent weeks, the IRS has sent letters (Letter 6173, Letter 6174, or Letter 6174-A) to approximately 10,000 taxpayers with regard to cryptocurrency transactions. This signals a serious step-up in enforcement efforts by the IRS in the cryptocurrency space since the July 2, 2018, announcement of the virtual currency campaign that indicated that the IRS was not contemplating a voluntary disclosure program specifically to address tax non-compliance involving virtual currency. The following is a brief overview of the taxation of cryptocurrency transactions, the content of Letters 6173, 6174, and 6174-A, and action items. In all three letters, the IRS has provided “educational” material and a hotline number for questions related to the letters, promising a response within three business days.
Additionally, some taxpayers are reporting receipt of CP2000 notices from the IRS, which assert that the taxpayer has underpaid tax with respect to cryptocurrency transactions. Unlike Letters 6173, 6174, and 6174-A, the CP2000 notice contains the IRS’s calculation of underpaid tax, plus interest.
BRIEF OVERVIEW OF TAXATION OF CRYPTOCURRENCY TRANSACTIONS
The IRS has issued limited guidance on the taxation of cryptocurrencies, namely Notice 2014-21, 2014-16 IRB 938 (the Notice). Generally, the Notice treats “convertible virtual currency” as property, rather than currency, for federal tax purposes.1
Gain or loss on cryptocurrency transactions is calculated in the same manner as other property sales: gain/loss = amount realized — adjusted basis. Both the amount realized and adjusted basis must be converted to US dollars for federal tax reporting purposes. The character of the gain/loss depends on whether the cryptocurrency is a capital asset in the taxpayer’s hands.
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Brandon Caroprese, CPA, MST