Fresh round of IRS letters targets misreporting crypto traders
Barely a month after sending over 10,000 letters to crypto holders urging them to pay their taxes, the Internal Revenue Service (IRS) is at it again. This time, the agency is targeting taxpayers whom it believes misreported their income from crypto transactions.
In the IRS CP2000 notice, the agency is no longer just advising the taxpayers to pay up what they owe. It’s now outlining the specific amount of money it believes the recipient owes in taxes. The notice is reserved for an instance when the reported amount by a taxpayer differs from the information the IRS obtains from third parties.
The CP2000 notices should be taken more seriously than the previous warning letters, tax experts have advised crypto holders. With the warning letters, the IRS is just advising the taxpayer to report his taxes. However, with the new notice, the agency makes it clear it knows what you should be paying, CoinTracker’s Chandan Lodha told Coindesk.
Lodha, whose company provides crypto tax payment services explained, “Basically what it says is ‘hey we have a report from one of the financial institutions you use and the amount they reported to us the IRS is different than the amount you, the taxpayer, reported and this is the amount you owe’ and it’s a 30-day letter meaning you have to respond in 30 days.”
According to some of the letters obtained by media sources, the IRS reportedly used information on Form 1099-K to calculate the taxes. The form is sent by some crypto exchanges to customers who transact beyond a pre-determined threshold. The exchanges also send a copy of the letter to the IRS.
However, the validity of using Form 1099-K to calculate the crypto taxes has been questioned by many tax experts. The form only indicates the aggregated transaction volumes but not the gains.
James Foust, a senior researcher at crypto advocacy group Coin Center attributes this confusion to the vague crypto taxation guidelines issued by the IRS.
He stated, “The 1099-K… isn’t really a good fit for reporting cryptocurrency tax information. But it [1099-K] and the 1099-MISC are the only information reports that the IRS mentions in Notice 2014-21 and I suspect that may be the reason exchanges have opted to use it in the absence of clear guidance from the agency.”
While the IRS has been criticized for not offering enough guidance on crypto taxation, crypto holders have also been advised to ensure they have all the information needed to avoid colliding with the agency.
Wendy Walker, the Solution Principal at Sovos told CoinGeek, “With some exchanges issuing 1099’s, others not issuing forms at all, and still others issuing different forms for the same types of transactions, it is important that the taxpayer ensure they have all of the information they need including dates of all assets purchased and sold and the corresponding values of the assets on those dates.”
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