Last Updated: August 25, 2020
Starting this week the IRS started sending over 10,000 warning letters to cryptocurrency users about filing their cryptocurrency taxes. This letter may come in three variants: 6173, 6174 or 6174-A. These are educational letters informing recipients to report unreported or underreported cryptocurrency related transactions.
"We have information that you have or had one or more accounts containing virtual currency but may not have properly reported your transactions involving virtual currency, which include cryptocurrency and non-crypto virtual currencies."
How is Cryptocurrency like Bitcoin Taxes in the United States?
In 2014, the Internal Revenue Service (IRS) released guidance that virtual currencies are taxed as property. This means that capital gains tax applies to cryptocurrencies such as bitcoin. Every time you dispose of a cryptocurrency (e.g. sell, trade, send to a third party in exchange for a good/service, etc.), a capital gains taxable event occurs.
For more information, see our cryptocurrency tax guide.
I received a letter 6173, 6174, or 6174-A. What should I do?
What you should do varies by the type of letter received. Letter 6174 & 6174-A are no action letters. This means you do not have to respond to these letters if you have met all the crypto tax filing obligations outlined in the letter. These letters recommend you filing amended or delinquent returns if you think you did not appropriately file crypto taxes in past years.
In contrast, Letter 6173 requires your action. If you do not respond to this letter on time, your tax account will be audited by the IRS. You should read through "What you need to do by the 'respond by' date above" section and provide necessary documents to the IRS. A qualified tax professional along with the help of CoinTracker reports can help you navigate through letter 6173 requirements.
Finally, note that these are educational letters sent by the IRS and you may get it despite being fully compliant with all your crypto tax reporting. The intent of these types of mechanisms is to increase crypto currency tax reporting compliance and not necessarily to penalize the taxpayers.
For a step-by-step guide on exactly what you need to do, check out this IRS crypto letter guide.
Which forms do I need to report cryptocurrency taxes?
In the U.S., at a minimum, you'll likely need to file:
- Form 8949 (Sales and Other Dispositions of Capital Assets) with a complete list of every cryptocurrency disposal you have had (e.g. sell, trade, send to a third party, etc.)
- Schedule D (Capital Gains and Losses) with an aggregate sum of your capital gains across all asset classes
- Form 1040 (Individual Income Tax Return) including your Schedule D information. Any income (from forks, airdrops, mining, or payments) will go on the "other income" line 21 of Form 1040 Schedule 1
- Schedule C (Profit or Loss From Business) to report mining & self-employment related income and expenses
For U.S. users, CoinTracker provides a Form 8949 as well as the cryptocurrency portion of the Schedule D (which can be used to fill out your Form 1040 as well). In addition a summary of your overall capital gains for cryptocurrency is provided in the "Capital Gains" section of the tax page.
If you held $10,000 or more on a foreign exchange (non-US based) at any time during the tax year, you need to file a FBAR (FinCEN Form 114). If you held more than $75,000 on a foreign exchange (at any time during the tax year) or more than $50,000 (on the last day of the tax year), then you must additionally file a Form 8938 (Statement of Specified Foreign Financial Assets, a.k.a FATCA).
These forms require knowing the number of transactions you performed on foreign exchanges, the max value of your assets on foreign exchanges during the tax year, and the balance on the final day of the tax year. CoinTracker automatically calculates these for you with a Trader or higher tax plan.
Additionally, if any of your cryptocurrency assets were lost or stolen, you will want to complete Form 4684 (Casualties and Theft). Note: this is only allowed before 2018.
If you underpaid your quarterly taxes for capital gains, then you will want to complete a Form 2210 (Underpayment of Estimated Tax by Individuals, Estates, and Trusts).
Disclaimer: this post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.