The IRS has recently began sending letters to certain owners of virtual currency (e.g., Bitcoin, Ether, etc.) regarding requirements for reporting transactions involving such virtual currencies. See IRS Information Release 2019-132. The IRS is concerned that taxpayers have been entering into virtual currency transactions and failing to properly report them. The letters are an offshoot of the IRS’ Virtual Currency Compliance program launched in 2018. The names of the taxpayers that will be receiving the letter were obtained by the IRS through its efforts as part of this program.
In Notice 2014-21, the IRS determined that virtual currency is considered “property”, and not currency, for federal income tax purposes. Taxpayers are generally required to report all sales and other dispositions of virtual currency, which includes the use of virtual currency to pay for goods, services or other property. This means that any sale, exchange or other disposition of virtual currency will trigger a gain or loss.
According to the IRS, by the end of August, more than 10,000 taxpayers will receive one of three forms of the letter (IRS Letter 6173, IRS Letter 6174 and IRS Letter 6174-A) that aim to educate taxpayers regarding their tax and filing obligations and how, in certain circumstances, to correct past errors or omissions with respect to these obligations. One form of the letter directs the taxpayer to take prescribed actions in certain situations (filing of a return, amending a return, etc.) by a date specified in the letter. The other letters do not require the taxpayer to take any action but are more informational in nature.
If a taxpayer receives any of the IRS letters related to virtual currency transactions, they should consult their tax advisors prior to responding to the IRS in order to determine the appropriate action to take, if any.