Virtual Currency, Real Reporting Requirements

July 30, 2019

IRS sends Warning Letters to Virtual Currency Owners

The IRS started sending warning letters to virtual currency owners to notify them of reporting requirements.  It plans to issue over 10,000 letters by the end of August.  Virtual currency owners who did not properly report transactions and take no action may face enforcement action in the future.  Thus, if you are a virtual currency owner, heed the warning and get advice to ensure you properly reported transactions.  If not, take corrective action as soon as possible to avoid IRS enforcement actions.

The IRS began issuing three warning letters: Letter 6174, Letter 6174-A, and Letter 6173.

WARNING LETTERS

The three warning letters let taxpayers know that the IRS is aware of current or former virtual currency accounts and educates taxpayers on reporting requirements.

Letters 6174 and 6174-A:

  • informs taxpayers that the IRS believes the taxpayer has or had at least one virtual currency account;
  • advises taxpayers to file amended or delinquent returns if the taxpayer did not accurately report the transactions; and
  • informs taxpayers of tax return schedules commonly used to report transactions.

Letter 6173:

  • informs taxpayers that the IRS believes the taxpayer has or had at least one virtual currency account;
  • informs taxpayers that the IRS did not receive an income tax return or a schedule commonly used to report transactions for tax years 2013 to 2017; and
  • advises taxpayers to file delinquent returns, amend returns, or provide information on how the taxpayer met the reporting requirements.

REPORTING REQUIREMENTS

Virtual Currency is considered property for federal tax purposes.  Owners must report income from virtual currency sales, exchanges and dispositions.  A person who holds virtual currency for investment purposes must report a capital gain or loss upon the sale, exchange, or disposition of virtual currency.

In some instances, taxpayers may have multiple reporting requirements.  For example, a business or independent contractor that receives virtual currency as a form of payment must report the fair market value of the virtual currency as gross income on the date of receipt.  When the business or independent contractor later sells, exchanges, or disposes of the virtual currency, it must also report gain or loss on the latter transaction.

ENFORCEMENT CAMPAIGN

The IRS reported that it was starting a virtual currency campaign in July 2018.  The issuance of the letters is the first widespread warning to taxpayers to comply with virtual currency reporting requirements.  Those who don’t may face enforcement action.

Don’t get caught in a tax debt trap from interest and penalties.  If you own or owned virtual currency, you need to take steps now to ensure you properly report(ed) transactions.  Contact me if you want advice on your reporting requirements or need assistance taking corrective action.

Shawnielle Predeoux is a CPA and tax attorney at Quantum Law, LLC. Shawnielle can be reached at 443-230-3328 or by email at [email protected].