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Second Verse, Same as the First: The IRS Sends Another Wave of Warning Letters Regarding Virtual Currency

By Anthony P. Daddino on August 26, 2020

As previously reported (Prior Blog Post), last summer the IRS sent letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from those transactions or did not report them properly. Well as the old saying goes, 1 is good, but 2 is better, as this summer the IRS initiates a second wave of letters to cryptocurrency users that suggest they may have misreported their transactions.

The second-wave of warning letters, identified as Letter 6174-A, look similar to the three versions of letters sent to taxpayer’s last summer.  A copy of the Letter 6174-A may be found here (Letter 6174-A).   These letters summarize general tax rules regarding the tax reporting of various different types of transactions involving cryptocurrency and state, in a not so subtle fashion, that taxpayers who believe they have sinned should repent:  “After reviewing the information below, if you believe you didn't accurately report your virtual currency transactions on a federal income tax return, you should file amended returns or delinquent returns if you didn't file a return for one or more taxable years.”  The IRS continues that taxpayers who do not repent, be forewarned:  “If you do not accurately report your virtual currency transactions, you may be subject to future civil and criminal enforcement activity.”

Of course not mentioned in these IRS warning letters is the reality that the IRS has issued virtually no guidance on the taxation of cryptocurrency transactions, other than (i) a notice in 2014 offering a general tax concept (some, but not all, of crypto is property!) that oversimplified and eschewed significant legal and equitable issues, especially issues arising in the context of crypto-to-crypto exchanges (Notice 2014-21), and (ii) a notice in 2019 that revealed a gross misunderstanding by the IRS of blockchain technology and the workings of hard forks and airdrops (Notice 2019-24).  Interestingly this second wave of letters follows the IRS’ recent decision to add a question about virtual currency transactions to the front page of the IRS’s draft of the 2020 Form 1040.   Well, who needs rules when you have enforcement.

If you have any other questions about virtual currency or an IRS controversy matter, please do not hesitate to contact me at (214) 749-2464 or adaddino@meadowscollier.com.