IRS Sends New Round of Letters to Bitcoin and Crypto Holders

Last week, the United States Internal Revenue Service sent another round of letters to crypto traders called CP2000. These notices were sent to traders of some crypto exchanges due to inconsistencies found in their tax reports.

Using the information provided by third-party systems — such as crypto exchanges and payment systems — the IRS has been able to determine the amounts traders owe and included the amounts in dollars in the notices. Individuals who have received these notices are required to pay within 30 days, starting on the delivery date indicated in the letter.

If you think the exchange — on which you traded — provided your details to the bureau, you are probably right, but do not hold it against the exchanges. The regulation stipulates that all broker and barter exchange services are required by law to annually report trader activity on a 1099-B form, send it directly to the IRS and send a copy to the recipient.

In addition, transaction payment cards and third-party network transactions are also required to report on Form 1099-K, send it directly to the IRS and send a copy to the payee.

The IRS has not yet published specific guidelines for crypto exchanges. In fiat stocks, every broker must submit 1099-B to the IRS and send a copy to the trader. In crypto, the IRS still didn’t publish clarification whether exchanges should provide 1099-K or 1099-B.

Exchanges can benefit from the uncertain situation to provide 1099-K — like Coinbase Proand Gemini — but some do not provide any forms, such as Kraken and Bittrex. Meanwhile, the exchange must provide the users with the 1099-K copy by the end of every January, so they will be available to use it in their capital gains report. The users, at the same time, don’t submit the IRS their copy of 1099-K, as they only use this form to calculate and report on their capital gains or loss report.

Similarly, earlier this month, the United Kingdom’s tax, payments and customs authority, Her Majesty’s Revenue and Customs, has reportedly requested that digital currency exchanges provide it with information about traders’ names and transactions, aiming to identify cases of tax evasion.

In the U.S., data gathered from these exchanges is collected by the IRS and compared to every trader’s 1099-K report. If the reports do not match the data provided by the exchanges, the IRS will send the CP2000 notice to traders. The notice includes the amount every trader is expected to pay within 30 calendar days.

What’s more, the notice generally includes interest accrued, which is calculated from the due date of the return to 30 days from the date on the notice. This Interest continues to mount until the amount is paid in full, or the IRS agrees to an alternate amount. It means that interest began on the due date — on the day that you were supposed to report this for the first time. If you should, for example, have included this capital gains on your 2017 report, the interest will start on April 2018 — the last day you should have reported this gain. And it’s calculated until the reply date on the CP2000 notice.

Those who received the CP2000 letter have two options:

If the amount proposed is correct:

Complete the response form, sign it and mail it to the IRS along with the tax payment.

If the amount proposed is incorrect:

Complete the response form and return it to the IRS along with a signed statement outlining why you are in disagreement with the amount listed. It is important to include any supporting documentation to your claims. 

It is highly recommended to provide a supporting calculation that is comprehensive and includes all wallet activities and transactions carried out on all exchanges in order to have a complete and accurate report as required by the IRS.

You do not need to file an amended return Form 1040X, but if you choose to do so, you should write “CP2000” on top of it.

It is important to understand that 1099-K reports for individuals trading crypto can be inaccurate in some cases, and does not include the cost basis, which is crucial for crypto trading calculations. 

1099-K only asks for the gross amount of the activity. In crypto reports, you need to know how much it costs you (how much you paid when you bought it) and not only how much you got when you exchanged it. You pay capital gains tax on the profit between the buy amount to the exchange (to fiat or another crypto) amount. 

The price you pay for it is called “cost basis.” Without it you will not have an accurate report on crypto. 1099-K forms don’t ask this information, only 1099-b forms do.

Therefore, crypto activity must be fully calculated and compared to the previous tax filing before replying to the IRS notice.

 

What is true, correct and complete?

1. Full activity report. The IRS requires tax compliance and reporting for cryptocurrency traders and investors across all their accounts. The report must include all activities — wallets, blockchain and exchange information — for the relevant years. You can use  a system that assists you to get a full report of all your transactions since day one. Today, some systems, based on blockchain, use distributed ledger technology to trace your entire history of currency activity from day one and provides alerts on incomplete information for retrieval, plus addresses that may have been forgotten. In what is essentially a turnkey tax solution for crypto, it can run the full gamut of related activities — including wallets, exchanges, initial coin offerings, etc. — and even goes so far as to issue one comprehensive report on the relevant years of activity for each year separately.

2. Correct old mistakes. Many had previously only reported when they had bought into or out of fiat. This is indeed relevant, as are transactions of crypto to purchase goods, other crypto assets and even stablecoins like Tether (USDT).

3. Make sure your calculation is right. While the specific identification method identifies the exact Bitcoin that you sold and calculates your tax liability on the sale of the actual Bitcoin based on the blockchain evidence, the first-in-first-out (FIFO) method does not take real-time user activity into consideration. To calculate in FIFO method, make a list of all purchases and a list of all sales. Then, match them. Take the first one in the purchase list and calculate the tax results as if you sold it at the price on the date from the first sale on the sales list. This can sometimes result in over taxation, especially if you bought your first Bitcoin (BTC) in the early years. In order to calculate using the specific identification method, you need to identify (by using evidence from the blockchain) the purchase dates and sales date of all Bitcoin that came in and out of your wallet for the same tax year. Then, you match the purchase and sale dates and prices of the same Bitcoin using blockchain data and finally, calculate the tax liability. If you don’t know how to do this, you can use a calculation platform.

Regardless of the letter you received and the steps you are advised to take, it is recommended that you consult with a tax professional to assist in compiling an accurate and comprehensive report.

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