Virtual currency owners, attention, please! Gavrilov & Co is reminding you to watch your mail for an important IRS letter.
For the last few blogs, we have been putting the spotlight on the restaurant industry. And we will return to that topic and we will spotlight other clients businesses soon.
However, we now shift our focus to bring you some a valuable IRS update in this blog. If you own virtual currency, heads up! You will discover some information that is need-to-know and critical to your financial health.
Paying Tax on Virtual Currency
Thousands of letters are going out from the IRS to taxpayers. If you own cryptocurrency, you might be getting a letter for one, two or all three of these reasons:
1. You might have gained income from virtual currency and failed to report it.
2. You possibly failed to pat the resulting tax from your virtual currency transactions.
3. Likewise, the IRS will write to you if you simply did not report the transactions properly. This could have been because you did not know how to do so.
Chuck Rettig, IRS Commissioner, stated, “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”
Thus he delivered a firm, no-non-sense message. And he added, “Taxpayers should take these letters very seriously…” Here’s what to do if you receive this IRS Letter:
- Review your tax filings.
- If you, as a virtual currency owner, discover discrepancies, then you have an obligation to amend past returns.
- Therefore, you will need to “pay back taxes, interest and penalties,” stated Commissioner Chuck Rettig.”
A Special Alert for Owners of Virtual Currency
As an owner of virtual dollars, you can expect to receive one of three versions of educational letters, probably by the end of August.
For taxpayers receiving an educational letter, there are three variations: Letter 6173, Letter 6174 or Letter 6174-A. According to Forbes, “all three versions are not the same…”
1. In one version, the virtual money owner is alleged to be noncompliant.
2. Another version simply states “that the IRS has been made aware of cryptocurrency activity attached to the taxpayer.”
Depending on the version of the letter you receive, your next steps may vary, but we hope you don’t dismiss that message. And we hope you do call your accountant.
Don’t Ignore the IRS Virtual Currency Letter
Although some tax lawyers debate the fact, the IRS explains that “all three versions strive to help taxpayers understand their tax and filing obligations and how to correct past errors.”
This is not just a scare tactic. The IRS has formally announced, “a Virtual Currency Compliance campaign to address tax noncompliance related to the use of virtual currency through outreach and examinations of taxpayers.”
And they added, “The IRS will remain actively engaged in addressing non-compliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.”
The Cryptocurrency Flashback in Time: Capital Gains and Bitcoin
Whichever form of the letter you receive, it will contain information about the forms and schedules you will need to bring your cryptocurrency into compliance.
However, we believe you will need your accountant to help you with the details. Additionally, Gavrilov & Co recommends you review some of our previous information about declaring your tax on virtual currency.
You might have noticed that last year the IRS announced that virtual currency owners “would be an ongoing focus area for IRS Criminal Investigation.”
Furthermore, as long ago as 2014, the Internal Revenue Service (IRS) gave virtual currency owners tax-paying direction. You can still find that detailed information.
To put it briefly, you might remember the IRS explained that they consider virtual currency a capital asset. Therefore, the tax rules of capital gains apply to your gains and losses.
A Quick Look at Some Scary Statistics
Then came a statistical shock for the IRS: In 2016, when virtual currency became mainstream knowledge and popular water cooler gossip, the IRS received “only 802 individual tax returns out of the 132 million filed electronically with the IRS…” When you know this, is it any wonder the government is stepping up efforts to increase compliance.
According to the IRS, the agency will continue to follow-up on cryptocurrency compliance through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.
The Take-away: Is the Letter A Fire Alarm?
Forbes recently called the letter a “warning shot” to owners of virtual currency.
We understand the gravity of the situation. But we would rather compare it to a
This new IRS letter is a strong, stern warning, like a strident fire alarm. And if you receive any version of this letter, we suggest you talk to your accountant immediately.
The Gavrilov & Co Tax Squad is standing by to help you understand the instructions in the letter. We can show you how to put your tax status back into good standing.
The bottom line is that if some virtual currency owners do not report appropriate taxes, they might face more than tax, penalties, and interest. In fact, the IRS might slate them for criminal prosecution.