New IRS Warning Letters Target Crypto Investors Who Misreported Trades

The U.S. Internal Revenue Service (IRS) is sending another round of warning letters to cryptocurrency users, this time to taxpayers it believes to have misreported income from exchange transactions.

In addition to the three letters sent last month to crypto traders advising them they may have incorrectly filed their taxes, the IRS is now also telling certain investors that they did, in fact, report the wrong amount of income from crypto transactions. And the agency is looking to collect.

According to one letter shared with CoinDesk, a taxpayer owed nearly $4,000 for the 2017 tax year. This taxpayer owed more than $3,600 in taxes alone, with another $200 or so in interest accrued.

The letter was dated July 29, 2019.

Chandan Lodha, co-founder of tax software provider CoinTracker, told CoinDesk that the IRS has been sending these so-called CP2000 notices to some customers, indicating they are potentially on the hook for revenue they did not report.

The IRS is sending out these other notices and those are kind of like warning letters of varying degrees of how threatened they were, Lodha said of the earlier three letters. But the CP2000 is a slightly different letter.

He went on:

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 its a 30-day letter meaning you have to respond in 30 days.

The CP2000 letter has been used outside of the cryptocurrency space for other forms of unreported income, Lodha said. However, its definitely a new phenomenon thats starting in the crypto space.

Lodha added that transfers from an exchange into another wallet shouldnt be a taxable event, but an exchange may still report it as such.

Paper chase

Justin Woodward, a co-founder and attorney with tax calculator startup TaxBit, told CoinDesk that hes seen more of these letters starting in August.

According to the IRS website, a recipient of the letter should respond regardless of whether they agree with the tax assessment or not. Those who disagree with the assessment should ask their financial institution to send a corrected statement.

Lodha added:

In terms of how the actual dynamic works, first they send you the CP2000, they send the proposed amount due and you say yes, Ill pay that or no, and heres the supporting documentation.'

According to the letter shared with CoinDesk, the recipient reported $0 in income from crypto transactions to the IRS in the 2017 tax year. However, information through Coinbase indicated the recipient should have reported more than $12,000 in income.

Neither the IRS nor Coinbase immediately responded to requests for comment Wednesday.

It is possible that such discrepancies come from how exchanges are reporting transactions.

Woodward said this likely comes from the exchanges issuing 1099-K forms, rather than 1099-B forms. Because 1099-K forms ...

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Tags: Internal Revenue Service, letter, Chandan Lodha, Tax, CoinDesk, letter, FDA warning letter, CoinTracker, Investor, Coinbase