IRS, Internal Revenue Service – the tax authority in the United States has sent out notices to thousands of cryptocurrency owners. It’s a standard letter sent to most of them and termed as Letter 6173, 6174 or 6174-A. It includes clear instructions on what has to be done in various scenarios.
This letter informs about a likelihood that you did not report your virtual currency transactions, asks you to check the return and, if necessary, file an amended return to correct this misreporting. You are not required to respond to the notice and the IRS does not intend to follow up on these notices.
As in Letter 6174, this letter tells you that there is a potential misreporting of virtual currency transactions. However, this notice states that the IRS may follow-up with future enforcement action.
Again, no response is required if the taxpayer believes that they are in compliance. However, receiving this letter means you have been identified as a noncompliant taxpayer for potential future enforcement.
This letter requests a response from the taxpayer about the alleged noncompliance. The letter provides instructions on responding to the IRS. The IRS intends to follow up on these responses to determine if the taxpayer is in compliance.
Each of these letters has instructions on how to respond and the sections to be filled on amended returns were clearly mentioned in different situations like trading, investing, receiving, transactions etc.,
Summary & Action required
If you received IRS Letter 6174-A in the mail recently, you’re not alone. The IRS is sending the letter to thousands of US taxpayers across the country.
Letter 6174-A is probably being sent to most Coinbase customers, not just suspected tax cheats, according to Forbes article
All of this boils down to an important point: you might receive IRS Letter 6174-A even if you accurately reported all of your cryptocurrency-related income. In that case, don’t panic. You likely received the letter just by nature of having a Coinbase account
IRS Letter 6174-A specifically says that no response is necessary if you already reported your cryptocurrency income. So, don’t stress about calling the IRS or replying to the letter to tell them your tax return is already correct.
This letter could probably be a part of a blanket mailing campaign to any individual the IRS knows has a cryptocurrency trading account. This would include over14,000 Coinbase users identified in the 2017 summons, taxpayers who receive a 1099 from US based crypto exchanges.
Extract from 6174
Following is the extract from Letter 6174 (06-2019) Catalog Number 72273Z as received from IRS.
You must report virtual currency transactions your return, regardless of whether you received a payee statement for the transaction (such as a Form W-2, Form 1099, etc.).
Common schedules for reporting virtual currency transactions include the following:
If you were an independent contractor and received payment in virtual currency, you must report it in gross income for the amount of the virtual currency’s fair market value, measured in U.S. dollars, as of the date and time you received the virtual currency. Gross income derived by an individual from a trade or business carried on by the individual as other than an employee is reported on Schedule C. This constitutes self-employment income and is subject to the self-employment tax.
For more information, you can refer to the instructions for Schedule C.
If you sold, exchanged, or disposed of virtual currency (e.g. Bitcoin, Ether), or used it to pay for goods or services, you have engaged in a reportable trånsaction and may have a tax liability. These transactions may be reportable on Schedule D. on the tax return, report the virtual currency received at its fair market value, measured in U.S. dollars, as of the date and time of the transaction.
You should maintain and review all transaction records, including bank, wallet, and exchange reports and statements to determine your basis, the amount received, and other information needed for reporting on Schedule D.
For more information, you can refer to the instructions for Schedule D.
If you received supplemental income in the fo of virtual currency, including income from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in REMICs, you may need to report this on Schedule E. On the tax return, report the virtual currency received at its fair market value, measured in U.S. dollars, as of the date and time of the transaction.
You may also need to file supplemental forms .g. Form 8582, Passive Activity Loss Limitations). See the instructions for Schedule E for any other circumstances that may apply.
For more information, you can refer to the instructions for Schedule E.
- Publication 17, Your Federal Income T (For Individuals)
- Instructions for Form 1040, U.S. Indivi ual Income Tax Return
- Instructions for Form 8949, Sales and O er Dispositions of Capital Assets
- Instructions for Form 1041, U.S. Incom Tax Return for Estates and Trusts
Letter 6174 (06-2019) Catalog Number 72273Z
What’s the takeaway?
Other two letters also contain similar information on what to be reported and how it has to be reported.
Report Gains or Losses
It is important for you to report your gains or losses from cryptocurrency trading, mining, staking and all other scenarios.
Carry forward your capital losses
This will also help sometimes if you had losses as they can be claimed up to $3000 and can be carried forward for the following tax year.
Use crypto tax software and avoid mistakes
Getting your transactions across exchanges, DeFi platforms, wallets is not an easy task. Having prices for every coin across the years and every minute is hard. Tax software like BearTax can help you in this scenario. Using such software will not only reduce your effort but also provides accuracy and an audit trail. It also provides you auto-generated tax documents like 8949 capital gains document and export to your favorite tax software like TurboTax Online or TaxAct.