IRS Sending Warning Letters to
More Than 10,000 Cryptocurrency Holders
The Internal Revenue Service announced recently that it began sending “educational letters” to taxpayers who own virtual currencies, such as Bitcoin and Ethereum. More than 10,000 taxpayers are expected to receive the letters advising them to pay back taxes on any income they failed to report.
The IRS obtained the names of the taxpayers through various ongoing compliance efforts. For example, the IRS filed a John Doe summons with Coinbase, one of the largest Bitcoin and Ethereum exchanges in the U.S., in 2016, to obtain the names of all its users, although it later limited the probe to those who engaged in transactions of $20,000 or more.
The aim of the letters being sent to taxpayers is to help taxpayers understand their tax and filing obligations and assist them in correcting previous filing errors. The letters also tell taxpayers where they can find relevant information on the IRS website, including which forms and schedules to use and where to send them. The IRS is expanding their efforts involving virtual currency, including increased use of data analytics and are focused on enforcing the law and helping taxpayers fully understand and meet their obligations. The IRS will continue to remain actively engaged in addressing noncompliance related to crypto transactions through various efforts, ranging from taxpayer education to audits to criminal investigations. Virtual currency is also an ongoing focus area for the IRS Criminal Investigation unit.
Back in 2014, the IRS issued Notice 2014-21 , which said that virtual currency is property for federal tax purposes and offered guidance on how general federal tax principles apply to virtual currency transactions. Compliance efforts follow these general tax principles, but the IRS has also been looking to update the guidance, as the cryptocurrency market has grown dramatically in recent years.
The IRS said it anticipates issuing additional legal guidance in this area in the near future. In the meantime, taxpayers who don’t properly report the income tax consequences of digital currency transactions could be liable for tax, penalties and interest, and in some cases, may even be subject to criminal prosecution.
More information on virtual currencies can be found on IRS.gov.