Cryptocurrency traders may have heard about the Internal Revenue Service (IRS) sending notices to crypto traders, causing them to worry about being audited or penalized by the IRS. In this article, we will explore the topic in-depth to help you understand these notices, why the IRS is sending them, and what you should do if you receive one.
Before we dive into the topic of IRS notices, it is essential to have a basic understanding of cryptocurrency taxes. Cryptocurrency is considered property by the IRS, meaning every time you trade, sell, or use it to purchase goods or services, it may trigger a taxable event. Taxable events may result in capital gains or losses, which must be reported on your tax return.
The IRS’s Interest in Cryptocurrency Taxes
The IRS has been interested in cryptocurrency taxes for several years. In 2014, the IRS released Notice 2014-21, establishing that virtual currency, including cryptocurrency, is treated as property for federal tax purposes. Since then, the IRS has been working to ensure that cryptocurrency traders are properly reporting their taxable events and paying the appropriate taxes.
The IRS’s Enforcement Efforts
The IRS has several methods for enforcing cryptocurrency tax compliance. One of these methods is through the use of notices. Notices are used to inform taxpayers that they may have made errors or omissions on their tax returns or failed to report taxable events related to cryptocurrency.
Types of Notices
There are several types of notices that the IRS may send to cryptocurrency traders, including:
- CP2000 Notices
CP2000 notices are sent when the income reported on a taxpayer’s tax return does not match the income reported by third-party sources. This may occur if the taxpayer failed to report taxable events related to cryptocurrency, such as trades or sales.
- Letter 6173, 6174, and 6174-A Notices
Letter 6173, 6174, and 6174-A notices are sent to taxpayers who the IRS believes may have failed to report taxable events related to cryptocurrency or failed to report them accurately. These letters inform taxpayers that they may be penalized if they do not report their cryptocurrency transactions properly.
- Letter 6174-A Notices
Letter 6174-A notices are sent to taxpayers who the IRS believes may have failed to report cryptocurrency-related taxable events. These letters inform taxpayers that the IRS is aware of their cryptocurrency transactions and that they should report them accurately.
What to Do If You Receive an IRS Notice?
If you receive an IRS notice related to cryptocurrency, you should first read it carefully. The notice will provide specific instructions on what you need to do to resolve the issue. In most cases, you will need to respond to the notice by providing additional information or correcting your tax return.
It is essential to respond to the notice promptly and accurately. Failure to do so may result in additional penalties or even an audit.
In conclusion, the IRS sends notices to cryptocurrency traders to ensure compliance with cryptocurrency tax laws. These notices may be scary, but they are essential to the IRS’s enforcement efforts. If you receive an IRS notice related to cryptocurrency, it is essential to read it carefully and follow the instructions provided. By doing so, you can resolve the issue and avoid penalties.
We hope this article has provided you with a comprehensive understanding of IRS notices for cryptocurrency traders. Please consult a tax professional for guidance if you have any questions or concerns.