The world of cryptocurrency has gained immense popularity over the past few years, and with it, the Internal Revenue Service (IRS) has been taking steps to ensure that crypto transactions are properly reported and taxed. The latest case that highlights the IRS’s seriousness in the news, is the IRS going after exchanges to release user information successfully such as Coinbase.
Last month (October 2023) the IRS was successful through legal actions at getting the cryptocurrency exchange Kraken to release user information relating to the tax years 2016-2020 on all users who had transacted over $20,000 ( This amount includes all transactions). Which means if you deposited $10k, and bought $10k of XRP/Bitcoin, you’ve hit the limit and your information will be shared with the IRS. This will entangle many more taxpayers, than most have imagined, and likely means mass notices will be sent out to users warning them of discrepancies, prior to an audit notice.
Prepare for Audits
As part of these efforts in the past, the IRS has issued a series of letters to cryptocurrency users, often referred to as “soft notices,” to address non-compliance issues. In this article, we will dive into the specifics of IRS Letters 6174, 6174-A, and 6173, what they mean for crypto users, and how to navigate the complex landscape of crypto tax compliance.
Understanding IRS Letters 6174, 6174-A, and 6173: What Are They?
The IRS has recently sent out approximately 13,000 of these crypto back tax letters to individuals who may have unreported crypto gains. These letters are designed to encourage voluntary compliance with crypto tax regulations. While some refer to all three letters as “soft notices,” it’s important to note that only one of them, Letter 6174, truly falls into this category.
Let’s take a closer look at each of these letters:
IRS LETTER 6174: The “Soft Notice”
Letter 6174 serves as a soft notice from the IRS. In this letter, the IRS acknowledges the possibility that the recipient may need to report crypto gains. The crucial distinction is that the IRS commits not to follow up with individuals who receive this letter. However, failure to amend taxes despite receiving this letter could lead to future complications if non-compliance continues, so it is important to reach out to a tax professional to analyze your specific situation.
IRS LETTER 6174-A: A Warning with Potential Consequences
Similar to Letter 6174, Letter 6174-A informs recipients that they are not required to respond to the letter but strongly encourages them to report any back crypto gains promptly. What sets this letter apart from 6174 is that it hints at the possibility of future enforcement actions by the IRS. In other words, recipients of Letter 6174-A have been put on notice and should address their crypto tax obligations immediately.
IRS LETTER 6173: The Serious Warning
Receiving IRS Letter 6173 should prompt immediate action. Unlike the other two notices, Letter 6173 explicitly requires a response and states that the IRS will follow up to ensure compliance. In IRS terms, “follow up” typically means an audit or investigation. In essence, the IRS is closely monitoring individuals who receive this letter, making it imperative to take corrective action promptly.
What to Do If You Didn’t Report Crypto on Your Tax Returns
If you failed to report your crypto transactions on your tax returns and received one of these letters, your risk of an audit is significantly higher. The IRS likely sent these letters because they have information about your crypto activities. It’s important to note that each crypto trade, purchase, and exchange is a taxable event, and must be reported even if you incurred a loss.
Reporting crypto transactions, including losses, is a legal requirement. The IRS expects you to report each trade separately on Schedule D and Form 8949. This is critically important now that the IRS is matching up dates to 1099-B’s crypto exchanges are filing with the IRS regarding activity, and will be equally important in the future when the new tax reporting form 1099-DA is finalized. Failing to disclose your losses can lead to the IRS assuming you had gains, potentially resulting in additional taxes and penalties.
Conclusion: Taking the Right Steps
In the world of cryptocurrency, compliance with tax regulations is essential. IRS Letters 6174, 6174-A, and 6173 are clear indicators that the IRS is actively monitoring your crypto activities. If you received one of these letters and have unreported crypto transactions, it’s crucial to take action immediately. Consulting with us at Corridor Consulting means we can help you navigate the complexities of crypto tax compliance, potentially saving you time, money, and providing peace of mind in the long run.
If you haven’t yet received these notices but are aware that you’ve misreported or underreported your cryptocurrency transactions, it’s crucial not to wait for the IRS to initiate action. Take proactive steps to address your crypto tax responsibilities, ensuring that your reporting is both accurate and compliant. By taking the necessary measures now, you can steer clear of the potential challenges that come with an IRS audit and safeguard your financial well-being.
Our team is here to assist you in navigating these complex issues. To get started, we strongly encourage you to schedule a discovery session with us today. We look forward to helping you achieve peace of mind and financial security for the foreseeable future.
