More than ten thousand virtual currency owners will receive letters from the Internal Revenue Service reminding them of their tax reporting requirements.
Three variants will be sent: Letter 6173 appears to be addressed individuals who buy, sell and trade cryptocurrencies like Bitcoin and Ethereum, and suggests that they “may not have met [their] U.S. tax filing and reporting requirements for transactions involving virtual currency. . . .” It explains the Service’s position that currency is property for tax purposes, and urges taxpayers to file amended or late individual income tax returns if they have neglected to report or improperly reported virtual currency transactions.
Letters 6174 and 6174-A are broader and could be targeting individuals or businesses that buy, sell, and trade cryptocurrencies, or venders who receive virtual currencies as payments for goods and services. Such vendors must include the fair market value of crypto received as gross income. If the vendor then holds the crypto instead of immediately exchanging for U.S. dollars, then it must track its basis for future tax reporting.
For those actively trading one form of crypto for another, the reporting requirements can be onerous. If one purchases one Bitcoin with ten thousand U.S. dollars, then later exchanges it for Ethereum when the price of Bitcoin is $11,000, the taxpayer must recognize $1,000 worth of gain at the time of the exchange even though no dollars were received. Multiply similar exchanges over the course of a year, and tax reporting can be a nightmare. Fortunately, many companies advertise software to assist with tax reporting, though Hood Law Group, LLC does not endorse any particular program.
*This post was originally published on August 6, 2019
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