Cryptocurrencies have gained popularity recently because of the backlash faced by them with the governments and how they operate. Governments are suspicious of the activities and how things work within the system and with the upper hand in saying they reach out to involved individuals by doing the thing they love- by sending letters to collect the revenue.
IRS made the announcement last month that they’ll be sending out 10,000 letters to cryptocurrency HODLERs and holders that were involved with the currency.
IRS interprets cryptocurrency as property under their tax codes. Unfortunately, it is not treated as real property. So if you make a good profit on your cryptocurrency earnings and sell those in the future, the profit earned on them should be locked away to pay for the taxes.
In the real world, the person will use those gains to buy more cryptocurrency and might not save them for paying the taxes. But in case the market crashes suddenly in December of 2019, they won’t have money to pay for the taxes. The IRS is so much better at finding gains than it is at finding losses.
Types of Letters
Two kinds of letters were sent out to people by the federal government. The first one was the letter 6174, which is an educational letter for the receiver, and it tells them about how the system works whereas the letter 6173 requires action and lack of activity can lead to an audit. Austin Woodward, CEO of TaxBit and a crypto taxation expert, explain the difference between the two letters.
He further tells an incident of how a cryptocurrency user received an audit letter that showed that the user owed $75,000 to the federal government. This happened because the crypto exchange must’ve sent them 1099-K form, which stated just the total amount earned from the crypto-assets and IRS assumes the whole amount as the income. But later on, it was discovered that the person only owed them $200 as taxes.
Receiving these letters from IRS is not a threat for people, but in fact, it shows how the government bodies are taking an interest in cryptocurrencies and trying to accept them.