Holders of virtual currently such as Bitcoin can expect to receive notices from the IRS within the next month advising them of their tax and filing obligations and how, if necessary, to correct past errors.
Virtual currency is treated as property for U.S. federal tax purposes. Consequently, the general tax principles that apply to property transactions apply to transactions involving virtual currency.
In other words, anyone who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.
Concerned that taxpayers selling, exchanging or otherwise disposing of virtual currency have not been properly reporting those transactions, the IRS has started sending educational letters to taxpayers identified as owning virtual currencies, such as Bitcoin and Ethereum. According to an article in Accounting Today, the IRS obtained the names of the taxpayers through various ongoing compliance efforts. For instance, the IRS filed a John Doe summons with Coinbase, one of the largest Bitcoin and Ethereum exchanges in the U.S. The initial summons sent in 2016 was to obtain the names of all its users, but later the probe was limited to those who engaged in transactions of $20,000 or more.
By the end of August, more than 10,000 taxpayers will receive one of three variations of these letters:
- Letter 6173 will be sent to taxpayers when, for one or more of tax years 2013 through 2017, the 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 will be sent when the 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 will be sent with the 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.
If you should receive any of these letters from the IRS, please contact us immediately.
Sources: RIA Checkpoint, Accounting Today