IRS sends second round of warnings to cryptocurrency investors

Some cryptocurrency investors are receiving a new round of letters from the Internal Revenue Service telling them that their federal tax returns don’t match the information received from virtual currency exchanges, a new front in the agency’s burgeoning scrutiny of the industry.

The letters acknowledge that trading exchanges, not the taxpayers, may have made the errors.

The letters are a fresh signal that the IRS is increasing its focus on cryptocurrency tax compliance, after first being slow to stay abreast of the growing industry.

Mining bitcoins
Bitcoin mining USB devices in a row with small fans.

The agency’s top criminal chief has described digital and virtual currencies as a “significant threat” to tax collection and said the agency will soon announce criminal tax evasion cases.

In 2017, the IRS won a landmark lawsuit that required digital currency exchange Coinbase to hand over data on customers who bought or sold at least $20,000 in cryptocurrency from 2013 to 2015.

The letters, which accountants say clients began receiving in recent weeks, are in addition to mailings the IRS began sending in late July to more than 10,000 investors warning that they may owe taxes on cryptocurrency transactions.

Some letters told recipients that they may be unaware of their tax obligations and urged them to file amended or delinquent returns. A harsher version gave other recipients a deadline to respond in writing and disclose crypto dealings from 2013 through 2017.

Unlike its release of the three letter types, the IRS didn’t formally announce its mailing of the latest letters. Instead, a page about what the latest letters mean and require appeared on the agency’s website.

“We received information from a third party (such as employers or financial institutions) that doesn’t match the information you reported on your tax return,” the website says. It adds that “this discrepancy may cause an increase or decrease in your tax, or may not change it at all.”

The latest letters are “unusual, because they are targeting a class of investors,” said Timothy Speiss of EisnerAmper LLP’s personal wealth advisers practice. “The first volume of letters I call ‘warning’ letters. Now it’s the IRS saying, we’ve got the records.”

A spokesman for the IRS, who requested anonymity because of agency rules, said that the latest letters will go out to a taxpayer any time the agency detects a mismatch between the trading profits or losses that taxpayers report on their returns and what third parties report to the IRS through forms known as 1099-B.

The person declined to say how many crypto taxpayers had received the latest letter, but added that they typically go out one or two years after a taxpayer has filed a return.

The IRS deemed crypto assets to be property rather than currency in 2014, the last time its only substantive guidance came out. That means the agency taxes crypto profits and losses like those for stocks, at capital gains rates.

IRS Commissioner Charles Rettig has promised further guidelines about how to record cryptocurrency transactions on tax returns. Accountants have said that the lack of official rules from the agency has meant many crypto investors and their tax advisers frequently have to guess at how to comply with the law and pay all the tax they owe.

— Lynnley Browning, Bloomberg News