Many Weiss & Company LLP clients have questions about how or whether to report gains and losses from cryptocurrencies, like Bitcoin.
These virtual currencies, which operate without a central bank or administrator, have become popular both as payment methods and as investments because they are decentralized, anonymous, and not tied to any government or institution.
It has not been completely clear how to report cryptocurrency transactions, but this year, the Internal Revenue Service has begun sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly.
IRS sends letters regarding compliance
The IRS started sending the educational letters to taxpayers in July. By the end of August, more than 10,000 taxpayers received these letters. The names of these taxpayers were obtained through various ongoing IRS compliance efforts.
For taxpayers receiving an educational letter, there were three variations: Letter 6173, Letter 6174 or Letter 6174-A. All three versions strived to help taxpayers understand their tax and filing obligations and how to correct past errors.
Taxpayers were pointed to appropriate information on IRS.gov, including which forms and schedules to use and where to send them.
“Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest, and penalties,” said IRS Commissioner Chuck Rettig. “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”
Understanding virtual currency compliance
Last year, the IRS announced a Virtual Currency Compliance campaign to address tax noncompliance related to the use of virtual currency through outreach and examinations of taxpayers. The IRS will remain actively engaged in addressing non-compliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.
Virtual currency is an ongoing focus area for IRS Criminal Investigation. IRS Notice 2014-21 (PDF) https://www.irs.gov/pub/irs-drop/n-14-21.pdf states that virtual currency is property for federal tax purposes and provides guidance on how general federal tax principles apply to virtual currency transactions. Compliance efforts follow these general tax principles. The IRS will continue to consider and solicit taxpayer and practitioner feedback in education efforts and future guidance.
The IRS anticipates issuing additional legal guidance in this area in the near future. Taxpayers who do not properly report the income tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.
For questions about reporting your cryptocurrency income, contact Weiss’s tax department.