If you follow our tax blog, you may have seen our recent article discussing whether cryptocurrencies, such as Bitcoin (BTC) and Ethereum (ETH), are reportable for purposes of FBAR or FATCA (respectively, Foreign Bank Account Reporting and the Foreign Account Tax Compliance Act). While the latest guidance suggests that cryptocurrency is not currently subject to offshore account reporting requirements, it is subject to U.S. income tax reporting requirements – and beginning this summer, the IRS is turning an investigative spotlight on taxpayers who may have failed to comply, or worse yet purposefully omitted crypto currency trading gains, mining income etc. If you engaged in cryptocurrency transactions in the current or any past tax year, but did not report or pay taxes on the resulting income when you filed your federal tax returns, you may be among the approximately 10,000 taxpayers who are expected to receive written warnings from the IRS before the end of August. If you have already received an IRS notice, or are concerned about a potential tax audit or criminal tax investigation involving unreported Bitcoin, it is in your best interests to contact a Bitcoin tax attorney for immediate assistance.
On July 26, 2019, the IRS issued a public notice, available here, cautioning taxpayers that the Internal Revenue Service “has begun sending letters to virtual currency owners advising them to pay back taxes” and “file amended returns,” an initiative which is “part of agency’s larger efforts” to enforce Bitcoin tax laws effectively – an effort which, in the past, has arguably been stymied by a lack of clarity in the IRS’ cryptocurrency rules. (In June 2016, for instance, the American Institute of CPAs called on the IRS for “additional, much needed, guidance” on Bitcoin and other cryptocurrencies, noting, “The issuance of clear guidance in this area will not only reduce the confusion and burden for tax preparers but also allow taxpayers to accurately comply with IRS rules.”)
This initiative is expected to affect approximately 10,000 taxpayers, who are expected to receive IRS letters by the close of August 2019. Such letters will be issued to taxpayers who “potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly” on federal income tax returns. While the IRS describes the letters merely as “educational” in the aforementioned notice, affected individuals should be on high alert, for as the notice cautions in closing, not only are noncompliant taxpayers potentially “liable for tax, penalties and interest” – they could also be targeted for criminal prosecution, in cases where the noncompliance was willful.
There are currently three variants of the letter. Depending on the circumstances, a taxpayer may receive Letter 6173, Letter 6174, or Letter 6174-A. If you have received any of these letters, or expect to receive one in the near future, you are advised to contact a tax professional for help right away. In addition, you may find the following Bitcoin tax FAQs helpful:
Questions and Answers About Bitcoin
Please note that these FAQs are intended purely to provide educational information and are not intended to substitute or function as legal advice.
As the IRS’ public notice pointed out, all three versions of the circulating letter contain information about how to resolve cryptocurrency tax compliance issues. However, due to the complexity of the regulations involved – and the substantial penalties that may hang in the balance – it is prudent to discuss potential strategies with a knowledgeable tax compliance attorney before communicating with the IRS. Speaking generally, it is never in your best interests to contact the IRS until you have discussed your matter with a tax attorney or attorney-CPA.
At the Tax Law Office of David W. Klasing, we are a boutique California tax firm with a focus on complex, niche tax issues, including the evolving regulatory and compliance issues that surround virtual currencies such as Bitcoin. If you have a question about your cryptocurrency reporting responsibilities, we are here to provide our dedicated and zealous support. To arrange a reduced-rate consultation with our cryptocurrency tax lawyers, contact us online right away, or call the Tax Law Office of David W. Klasing at (800) 681-1295 for assistance.
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