On Friday, July 26, the IRS announced that it has begun sending letters to taxpayers who may have failed to report income and pay the resulting tax from virtual currency transactions or who did not report their transactions properly. The IRS has been concerned that taxpayers selling, exchanging, or otherwise disposing of virtual currency have not been properly reporting those transactions, and it is expected that by the end of August, more than 10,000 taxpayers will receive these letters.
There are three variations of the educational letter, and all three versions are intended to help taxpayers understand their tax filing obligations and how to correct past errors.
- Letter 6173 – Sent to taxpayers when, for one or more of tax years 2013 through 2017, IRS has not received either a federal income tax return or an applicable form or schedule reporting the taxpayer’s virtual currency transactions.
- Letter 6174 – Sent to taxpayers when IRS has information that the taxpayers have or had one or more accounts containing virtual currency but may not know the requirements for reporting transactions involving virtual currency.
- Letter 6174-A – Sent to taxpayers when IRS has information that the taxpayers have or had one or more accounts containing virtual currency but may not have properly reported the transactions involving virtual currency.
VIRTUAL CURRENCY INCOME
By definition, virtual currency is a type of digital currency that is only available in electronic form and functions as a medium of exchange, a unit of account, and/or a store of value. There are many types of virtual currencies, including cryptocurrencies like Bitcoin and Ethereum, and it does not have legal tender status in any jurisdiction.
For U.S. federal tax purposes, virtual currency is treated as property, and the general tax principles that apply to property transactions apply to transactions using virtual currency (Notice 2014-21, 2014-16 IRB). It is not, however, treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes.
According to the IRS, a taxpayer who receives virtual currency as a payment for goods or services must include the fair market value of that virtual currency – in U.S. dollars – as part of their reported income.
REPORTING YOUR VIRTUAL CURRENCY
Taxpayers who receive a letter from the IRS will be directed to the appropriate information on IRS.gov, including which forms and schedules to use and where to send them.
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Brandon Caroprese, CPA, MST