Receiving a letter from the Internal Revenue Service can be stressful, especially when the notice concerns cryptocurrency transactions that you may not have fully reported. IRS Letter 6173 is a compliance letter related to digital asset activity and can require a taxpayer to take action by a specific deadline.
The IRS has used information obtained from cryptocurrency exchanges and other sources to identify taxpayers who may have engaged in digital asset transactions. The original IRS cryptocurrency compliance letters included Letter 6173, Letter 6174, and Letter 6174-A. These notices were designed to remind taxpayers of their digital asset reporting obligations and, in certain situations, request a response or additional compliance action.
If you receive an IRS notice concerning cryptocurrency, do not ignore it. Carefully review the letter, identify what the IRS is asking you to do, and pay close attention to any response deadline.
Understanding IRS Cryptocurrency Compliance Letters
What Is IRS Letter 6173?
Letter 6173 is a compliance letter that the IRS has used when it believes a taxpayer may have engaged in cryptocurrency transactions that were not properly reported.
The letter can be more serious than a general informational notice because it may require the taxpayer to respond under penalties of perjury and provide information regarding compliance with federal tax requirements.
The IRS may have information indicating that a taxpayer received, sold, exchanged, or otherwise transacted in digital assets. Receiving the letter does not necessarily mean the IRS has determined that you owe a specific amount of tax. However, it does mean the notice should be taken seriously.
If you receive Letter 6173, read the instructions carefully and determine exactly what response is required and when it must be submitted.
What Were IRS Letters 6174 and 6174-A?
Letters 6174 and 6174-A were also used by the IRS to communicate with taxpayers regarding cryptocurrency and digital asset reporting.
Letter 6174 generally served as an educational notice reminding taxpayers about their obligations concerning virtual currency. It explained that taxpayers are responsible for reporting taxable digital asset transactions.
Letter 6174-A similarly informed taxpayers that the IRS had information indicating possible cryptocurrency activity and reminded them of their reporting responsibilities. Depending on the circumstances, the letter could indicate that the IRS believed the taxpayer may have failed to report certain transactions correctly.
The important point is that taxpayers should not assume a digital asset transaction is outside the tax system simply because the transaction occurred through a cryptocurrency exchange rather than a traditional financial institution.
Why Did the IRS Send Cryptocurrency Letters?
The IRS has worked to improve compliance with digital asset tax requirements. Information from cryptocurrency exchanges and other sources can help the agency identify taxpayers who may have digital asset activity that does not appear to match information reported on their tax returns.
Cryptocurrency transactions can be complicated because taxpayers may use several exchanges, wallets, payment platforms, or decentralized applications.
A taxpayer may also have transactions that include:
- Buying cryptocurrency.
- Selling cryptocurrency for U.S. dollars.
- Exchanging one digital asset for another.
- Using cryptocurrency to purchase goods or services.
- Receiving cryptocurrency as compensation.
- Mining or staking digital assets.
- Receiving digital assets through certain rewards or distributions.
Not every digital asset transaction creates the same tax result. The tax treatment depends on the facts and circumstances of the transaction.
What Should You Do After Receiving an IRS Cryptocurrency Notice?
The first step is to carefully read the entire notice. Identify the tax year involved, the transactions or reporting issue referenced, and the deadline for responding.
Next, gather your cryptocurrency and tax records. Depending on your circumstances, useful documentation may include exchange statements, wallet records, transaction histories, purchase confirmations, sales records, bank statements, Forms 1099, prior tax returns, and records showing transfers between wallets.
Do not automatically assume that every transfer shown in your records is taxable. For example, moving digital assets between wallets that you own can be different from selling an asset or exchanging one cryptocurrency for another.
If you cannot determine why the IRS sent the notice or how your transactions should be reported, professional tax assistance can help you evaluate the situation before responding.
Responding to an IRS Cryptocurrency Notice
Can Unreported Cryptocurrency Transactions Be Corrected?
If you discover that cryptocurrency transactions were omitted or incorrectly reported on a previous tax return, the appropriate solution depends on your circumstances.
In some cases, a taxpayer may need to amend a previously filed return. Other situations can involve multiple tax years, substantial transactions, missing records, or additional tax issues that require a more detailed review.
Before filing a correction, it is important to determine exactly what transactions occurred and how they should have been reported. Simply estimating cryptocurrency gains or relying on a single exchange statement may not provide an accurate picture of your complete digital asset activity.
A tax professional can review available records, help identify potential discrepancies, and discuss the appropriate steps for addressing previously unreported information.
What Records Should Cryptocurrency Taxpayers Keep?
Good recordkeeping is one of the most important parts of cryptocurrency tax compliance.
Maintain documentation showing the date of each transaction, the type and quantity of digital assets involved, purchase price, sale proceeds, transaction fees, and other information needed to establish cost basis and calculate gains or losses.
If you use multiple cryptocurrency exchanges or wallets, keep records from each platform. You should also retain information about transfers between wallets so that personal transfers are not mistakenly treated as sales or exchanges.
For mining, staking, or other digital asset income, maintain records showing when assets were received, the amount received, and the information used to determine their value.
Organized records can make tax preparation easier and can also help if the IRS later asks questions about your digital asset activity.
Should You Ignore an IRS Cryptocurrency Letter?
No. Ignoring an IRS notice can create additional problems, particularly when the notice includes a specific deadline or requests a response.
If you received Letter 6173 or another IRS communication concerning cryptocurrency, review the notice promptly. Do not assume the matter will disappear because you believe your transactions were reported correctly.
If you believe the IRS has incomplete or incorrect information, supporting documentation may help explain your position. The appropriate response depends on the specific notice and your individual tax circumstances.
How TLC Action Income Tax Service Can Help
Cryptocurrency tax issues can become difficult when transactions involve multiple exchanges, wallets, years, or types of digital assets.
TLC Action Income Tax Service provides tax preparation and tax representation services and can help taxpayers understand their reporting responsibilities and address tax issues involving cryptocurrency.
If you receive an IRS cryptocurrency notice, bring the complete notice along with your available tax returns, exchange statements, transaction records, and other relevant documentation. Having these materials available can help a tax professional better understand your situation and determine what steps may be appropriate.
Final Thoughts
An IRS cryptocurrency notice should be taken seriously, but receiving a notice does not automatically mean that you owe additional tax or that you intentionally violated tax rules.
The most important steps are to read the notice carefully, understand the response deadline, gather complete records, and seek professional guidance when the reporting requirements are unclear.
Cryptocurrency tax rules can be complex, and digital asset reporting requirements may change over time. Using current IRS guidance and maintaining accurate records can help you stay compliant and better prepared to respond if questions arise.
Received an IRS cryptocurrency notice? Contact TLC Action Income Tax Service to discuss your situation and learn how professional tax assistance may help you respond appropriately.