Got a Crypto Tax Letter from the IRS? Here’s What to Do!
You may have been sent either letter 6173 or 6174. These indicate that the IRS is simply checking that cryptocurrency traders are not skipping taxes. As of 2014, the IRS began classifying crypto as property; therefore, capital gains apply to crypto. So, whenever you trade, use or sell your cryptocurrency, a capital gains taxable action occurs. If you have received letter 6173 however, it means you have failed to report your earnings. If you have received letter 6174, then the IRS is simply informing you that they are aware of your crypto investments. Receiving 6174 also means that they believe you haven't been entirely honest when filing your taxes.
What Are Letters 6173 and 6174 - And What Should I Do?
The action you take depends on which letter you’ve received. If you’ve got letter 6173, you need to respond as soon as possible, as you could face an audit if you ignore it. You must carefully read the letter and take note of your 'respond by' date. It would be wise to contact a tax professional for further assistance.
Letter 6174, on the other hand, does not require such, or particularly any, action. You only need to reply to this letter if you have not met your crypto-tax filing obligations or have possibly failed to file taxes correctly in the recent past. It is also important to contact a professional if you need to amend your filings. Getting this letter doesn't necessarily mean you have done anything wrong or need to respond. You might receive it even if you have done everything right. The letter is merely intended to increase correct filing and payment of taxes among crypto investors.
Filing the Correct Tax Forms
There are a number of forms you need to file. These are the basic forms required, although bear in mind there might be additional ones.
- Sales and other dispositions of capital assets (form 8949) - This form is for you to list every single crypto trade you have performed including buying, selling, using as payment, sending to another person and any other related activities.
- Capital Gains and Losses (Schedule D) - This is the total of your asset gains and should include all your assets, including your cryptocurrencies.
- Individual income tax return (Form 1040) - This form contains all your income including those earnings filed under Schedule D. Any income resulting from crypto actions are filed in the 'other income' section of the form. Therefore, any income from the airdrops, mining or payments should be here.
- Profit or Loss from Business (Schedule C) - All expenses from self-employment or mining-related earnings are filed with this form.
- Schedule E - You file supplement incomes with this form. If you have received any form of passive income such as royalties, real estate returns from rent, etc. in the form of crypto, it must be filed here.