IRS Tax Letters Explained
If you are a recipient of the recent IRS tax letters 6173, 6174, or 6174-A regarding your crypto holdings, understanding your filing obligations is crucial. In order to help you understand those obligations and follow proper procedures to ensure the health of your assets, we’ve provided a guide below.
What are the crypto tax guidelines?
According to clarifications released by the IRS in 2014, virtual currencies such as Bitcoin are considered assets that are subject to capital gains: 25% short term, 15% long term.
For example, if you purchase Bitcoin, it appreciates in value, and you sell it, that gain is taxed. Similarly, if you purchase Bitcoin and it depreciates, you may be able to report those losses and deduct them against other capital gains to lower your taxes.
In general, taxable events with regards to cryptocurrency are:
- Selling cryptocurrency for fiat currency (i.e. USD, CAD, EUR, JPY, etc.)
- Trading cryptocurrency for other cryptocurrency
- Receiving cryptocurrency as a result of a fork or from mining
- Using cryptocurrency to purchase goods or services
- Buying cryptocurrency with fiat currency
- Donating cryptocurrency to a tax-exempt organization
- Gifting cryptocurrency in small sums
- Transferring cryptocurrency between two wallets you own
I received a letter 6173, 6174, or 6174-A. What should I do?
There are three variants of the educational IRS letters informing recipients to report unreported or underreported cryptocurrency related transactions. The response required depends on the type of letter received.
Letters 6174 & 6174-A are largely labeled as ‘no action’ letters – but this is not completely accurate. If you have received any of the three versions of the letter, it means the IRS has information on your accounts that must be reviewed. These letters recommend that you file amended or delinquent returns, as upon review of your accounts, the IRS has found that you may not have appropriately filed your returns. It is advised that recipients of these letters go back through their past returns and perform sanity checks to make sure the information is correct. As long as you check and file an amended return, the IRS will not take legal action against you.
In contrast, Letter 6173, the most serious of the letters, requires your action. If you do not respond to this letter on time, your tax account will be audited by the IRS. Recipients must respond to this letter within 30 days of the date listed on the letter. This letter requires you to report all crypto transactions between 2013 and 2017, including transactions between wallets and exchanges.
Steps to take:
- Anyone who has not filed for one year or all of the years from 2013-2017, should submit delinquent returns as soon as possible. File the delinquent returns with an explanation that failure to report was not due to delinquency and invasion. If explanations exhibit good faith, the IRS will not pursue legal actions. However, if the cause is not reasonable in the eyes of the IRS, you may be subject to civil or criminal penalties.
- Anyone submitting reports to amend incorrect calculations from 2013-2017 should submit Form 1040X to correct any calculation errors.
- If you believe you are legally required to file, submit an affidavit stating that you have filed the entire history of currency operations, including the means taken to ensure compliance with IRS requirements. Within the affidavit be sure to report that your filing is True, Correct, and Complete as it must meet all three criteria. Additionally, you must submit all copies of previous reports.
If you are still unsure of your obligations and need further assistance in figuring out the next steps, please contact us for proper guidance. Our reliable and in-depth crypto tax software takes the guesswork out of filing, saving you time, money, and aggravation.
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