IRS Warns Cryptocurrency Owners

“Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties,” IRS Commissioner Chuck Rettig said in a news release.

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With over 10,000 letters sent out this summer to virtual currency holders, the IRS is cracking down on taxpayers to provide more accurate information on their returns. The notifications received by taxpayers range from dentle reminders to review and amend returns, to potential audits or even criminal prosecution. The IRS has only recognized cryptocurrency as taxable income or capital gains since 2014, labeling it as property under tax law. Similar to real estate, the sale or exchange of tokens for other goods is a taxable activity. Yet the rate at which these transactions take place, as well as the constant flux in market value make it difficult for both the taxpayer and the IRS to track.

Many of the letters received by virtual currency holders shed light on a new method for reporting. Since 2014, holders have been told to apply one exchange rate for all transactions that occured throughout the day. This method causes inaccuries as the market value can change drastically over the course of a day. The IRS is now requesting the exact time and date of each transation. This way, if a holder has multiple transactions in one day, the exchange rate must be current with the time of the transaction. This would provide more accurate reporting for tax purposes, but an online trader could be hardpressed to go back and obtain this information.

The IRS plans to issue legal guidance and educational resources for those wishing to remain compliant with the law. Although for the moment, their efforts seem to be focused on tracking down taxpayers who have failed to report their earnings properly. The future of cryptocurrency is most definitely uncertain, but we can be sure to see significant changes to the tax code in the coming years as the IRS adapts to this new method of currency.