What are IRS Tax letters 6173, 6174, 6174-A for Crypto Investors?
Cryptocurrency, as the most momentous application of blockchain technology, was originally envisioned as a game-changer on a civilizational scale:
- Decentralizing the distribution and flow of money, independent of politics of any central body.
- Incapable of being tampered with, without stealing private keys.
- Impervious to inflation due to the limited supply.
However, things did not pan out as people envisioned. It turns out that the entrenched habits of masses serve as a severe obstacle in cryptocurrency adoption. If something is not run by the government, how can it be trusted?
This is the common and predictable refrain. After all, government, through its power over corporations, cultural institutions and monopoly over physical force, forms the mindset of most people.
Therefore, in order for cryptocurrency to be adopted into the mainstream mindset, it must intertwine itself with the established banking processes and government regulations. By doing so, inevitably it loses its main appeal – escaping governmental abuse.
More importantly, there is no reason why cryptocurrency couldn’t replace fiat money, whose value is arbitrarily declared. That is what fiat means. And history is riddled with examples of crashed fiat currencies.
This is the context in which President Donald J. Trump recently tweeted his attack on the very concept of cryptocurrency. The people who told the President to tweet this are anxious about the huge potential of cryptocurrency to upend fiat money, and their embedded interests.
Accordingly, this is the context in which you should view the Internal Revenue Service (IRS) spamming over 10,000 warning notices to cryptocurrency users.
Specifically, letters 6173, 6174, and 6174-A.
How does the IRS treat cryptocurrency?
In the US, cryptocurrency is property and is taxed as such.
This translates to capital gain taxes being applied to all cryptocurrencies, foremost of which is Bitcoin (BTC). Whenever you engage in online exchange trading, buying and selling, or sending third parties for services and products provided, you create an event that is amenable to capital gain taxation.
Should you be worried?
If you are a recipient of IRS letters 6174 and 6174-A, you should not be worried at the moment.
These letters are so-called “no-action letters”, which means that no action is required if you already followed the taxation obligations referred to in the letters. Furthermore, they are reminders to you to fulfill those obligations. IRS occasionally issues such notices as an exercise in education. This helps people avoid legal trouble, form tax habits, and it lessens their workload.
In short, here is the breakdown of the two “no-action letters”:
Letter 6174 – The IRS could not have sent you this letter if they didn’t have knowledge that one of your accounts contains or contained cryptocurrency. A reminder of what you should report if you haven’t done so already, and a guide to check your reporting for any errors or omissions.
Letter 6174-A – An escalated letter which may indicate that the IRS has the inclination to believe that there is a failure in reporting your tax obligations. Nonetheless, it is still a “no action” letter. Unlike in letter 6174, the language is escalated with the following phrase:
“may not have properly reported your transactions involving virtual currency”
Everything else from letter 6174 applies. You are being reminded to check if anything is amiss with your Bitcoin taxes and act accordingly without any formal response obligation.
On the other hand, letter 6173 is an entirely different matter. To this letter, you must respond before the specified date expires. Otherwise, you will be audited by the IRS.
Respectively, you must respond by providing all the documents they require of you.
What documents do you need for letter 6173?
Unless your situation is unique enough to require professional tax help, you need to file four documents in response to letter 6173:
- Form 1040 – Individual Income Tax Return – Income that includes Schedule D records. All the income that included cryptocurrency-related activities – mining, airdrops, payments, forks…will go online 21 under “other income” in Form 1040, Schedule 1.
- Form 8949 – Sales and Other Dispositions of Capital Assets – a complete record of all transactions that took place – selling, trading, sending to third parties – across all cryptocurrencies you had.
- Schedule C – Profit or Loss From Business – your report of all the income received from mining or self-employment related to cryptocurrencies.
- Schedule D – Capital Gains and Losses – this is the total sum of your capital gains across all virtual asset classes.
Additional conditions to consider
Cryptocurrency trading is a global endeavor, surpassing national borders. Therefore, you likely availed yourself with the service of foreign exchanges.
If that was the case, and you held $10,000 USD or more on an exchange that is not based and registered in the US, you also have to file FBAR – FinCEN Form 114.
If you traded with more than $75,000 USD on a non-US based exchange, or over $50,000 USD on the last day of the tax year, you have to file Form 8938 in addition to other forms, which you might have heard of as FATCA – Statement of Specified Foreign Financial Assets.
If you were unfortunate enough to be a victim of cryptocurrency theft or loss, you should file Form 4684 (Casualties and Theft). However, only if the theft or loss occurred before 2018.
Lastly, if you find out that you underpaid quarterly cryptocurrency taxes for capital gains, you should fill Form 2210 (Underpayment of Estimated Tax by Individuals, Estates, and Trusts).
As President Trump indicated with his cryptocurrency tweets, we are entering a phase of increased governmental scrutiny. They will not tolerate any advantage that cryptocurrency inherently holds, so IRS is going to engage in escalated enforcement of regulations.
No doubt, as is their tradition, IRS will select a few heavily publicized cases of tax miscreants to serve as an example for the rest of the cryptocurrency users.
To not become one of those examples, make sure you have all of your cryptocurrency dealings ordered and transparent.