IRS Begins Sending Cryptocurrency Tax Compliance Letters
US Internal Revenue Service announces campaign sending warning letters to over 10,000 taxpayers about cryptocurrency reporting requirements.
On July 16, 2017, the United States Internal Revenue Service announced it had begun sending warning letters to more than 10,000 taxpayers who might have failed to report income from cryptocurrency transactions or who had not properly reported their virtual currency activity. The IRS sent three different versions of notification (Letters 6173, 6174, and 6174-A) depending on the perceived level of non-compliance, ranging from gentle reminders to more serious warnings about potential penalties for continued non-compliance.
The letters represented the IRS's first major enforcement action specifically targeting cryptocurrency taxpayers.
The IRS enforcement campaign had significant implications for the cryptocurrency community. Many early Bitcoin adopters had not filed proper tax returns for their cryptocurrency transactions, either out of ignorance about reporting requirements or deliberate evasion based on beliefs that cryptocurrency operated outside government jurisdiction.
The IRS had obtained customer records from Coinbase through a court order, providing the agency with detailed information about users' cryptocurrency transactions. The warning letters made clear that the IRS was serious about cryptocurrency tax compliance and had the tools to identify non-compliant taxpayers. The campaign created anxiety among cryptocurrency holders who realized they might owe substantial back taxes, penalties, and interest.
It also spurred growth in cryptocurrency tax software and accounting services as users scrambled to determine their obligations.The IRS action represented a maturation in government treatment of cryptocurrency, moving from ignoring it to actively enforcing tax compliance, signaling that Bitcoin's growth had made it impossible for tax authorities to disregard.