Cryptocurrency tax Alex Kugelman appeared on the BitcoinTaxes Podcast with Salvatore Vescio to discuss the purpose behind IRS Letters 6173, 6174, and 6174-A and what they mean for crytpo users and traders.
Listen to the full podcast and read the highlights below.
What are the differences between the three IRS Letters?
“The basic thrust is that the IRS has information that the recipient had some cryptocurrency account and may not have fully reported gains or losses from the activity,” Alex explained. “The 6174 is what’s been termed, or people have described as, a ‘soft notice’ – just putting people on notice of what the tax reporting obligations are. The 6174-A is a little bit more direct. The 6173 from my perspective is the letter to be taken more seriously by recipient because it requires a response.”
What are the two goals behind the IRS sending those Letters?
“One is for (each recipient) to address any outstanding issues – voluntary compliance to get as many people in compliance to all tax reporting obligations. The second, which I think has been really effective, is to spread this news to a wider audience – this was all over the Internet. That’s exactly how the IRS motivates people to comply with tax laws: get the word out and get people thinking ‘right now I have to really take this issue seriously’.”
What should these IRS Letters mean to cryptocurrency users and traders?
“For people who just purchased and held onto crypto, what you want to do is just keep good data, good records, but you really don’t have anything to do. However, if you did receive the 6173, then you would respond.”
“For people who had net losses…the taxpayer made a bunch of trades, ultimately came out on the short end of the stick and had losses and didn’t report anything because they don’t have any additional tax owed. Subjectively that might be true, but objectively that’s a major problem. If the data provided by the exchange shows a certain number of taxable events or sales it’s not clear from that data that there’s going to be a basis that exceeds what the sales price is. For people that are in that boat, I would highly recommend that they amend returns so you’re actually showing each of the transactions and how you arrive at that figure.”
“If you got the letter…you’re now part of a pool of certain taxpayers that has a lot of scrutiny.”
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