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IRS Commissioner: Cryptocurrency Holders Should Take Warning Letters “Very Seriously”

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Posted on August 16, 2019 | Share

The Wall Street Journal (WSJ) and other news outlets have recently reported that the Internal Revenue Service (IRS) is in the process of sending warning letters to cryptocurrency holders. So far, the cryptocurrency IRS letter has been sent to over 10,000 individuals (as of the end of July), and the WSJ reports that the agency plans to send more letters throughout the month of August.

The WSJ also reports that the IRS is sending three different versions of the cryptocurrency warning letter, “depending on the information the IRS has about the recipient.” While the IRS refers to the warning letters as “education letters” in a News Release on its website, cryptocurrency holders who receive the letters (and even those who don’t) need to understand that they could be at a serious risk for substantial tax liability – and potentially even criminal prosecution for tax evasion. As IRS Commissioner Chuck Rettig warns in the News Release:

 “Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties.”

The News Release goes on to state that, “[t]he 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.”

Do You Owe U.S. Federal Tax on Your Cryptocurrency Holdings?

Cryptocurrency assets are subject to federal income taxation. The IRS has taken the position that, “U.S. persons are subject to tax on worldwide income from . . . transactions involving virtual currency.” IRS Notice 2014-21 provides additional guidance on the federal tax treatment of virtual currency, stating that:

• Virtual currency is treated as property for federal tax purposes, and “[g]eneral tax principles applicable to property transactions apply to transactions using virtual currency.”
• Businesses that receive virtual currency as payment for goods or services must include, “the fair market value of the virtual currency . . . as of the date that the virtual currency was received,” in their computation of taxable gross income.
• A taxpayer’s basis in cryptocurrency is calculated as the fair market value in U.S. dollars at the time of receipt. The characterization of gain or loss is determined by “whether the virtual currency is a capital asset in the hands of the taxpayer.”

In other words, the IRS treats cryptocurrency similar to stocks, bonds and even ordinary cash income. While cryptocurrency investors may be entitled to pay tax at the capital gains rate, many cryptocurrency holders will owe ordinary income tax as well. Now that the IRS is cracking down on cryptocurrency tax evasion (calling it an “ongoing focus area” for its Criminal Investigation division), anyone who owns cryptocurrency that they have not reported to the IRS should speak with a tax lawyer promptly to protect themselves from any errors that could lead to serious criminal consequences. 

Have You Received a Cryptocurrency IRS Letter? Protect Your Interests Now. 

Have you received a warning letter from the IRS stating that you may owe tax, interest and penalties on your cryptocurrency holdings? If so, you must respond carefully in order to avoid exposing yourself to additional criminal and felonious penalties. For a confidential consultation with cryptocurrency tax lawyer Kevin E. Thorn, Managing Partner, Thorn Law Group, call 617-692-2989 or request an appointment online now.