Attention Crypto Investors: Did You Get an IRS Warning Letter?

August 01, 2019

By Tim Speiss

The IRS and other regulatory bodies continue to focus on the tax reporting by persons (investors) engaged in cryptocurrency transactions. Tax professionals are also working diligently to assist investors with the proper federal and state tax reporting rules, which can be very complex and continue to evolve rapidly. This investor assistance is critical to make sure investors are in compliance with their tax reportings, so that they avoid potential penalties and interest attributable to non-reporting. Following are several issues taxpayers should advisors should be aware of when investing in cryptocurrency:

  • IRS Notice 2014-21 provides and describes general tax principles for property transactions of cryptocurrency, which is defined as “property” by the IRS for accounts in both the U.S and abroad. The week of July 22, 2019, under three separate letters, the IRS requested this information from certain taxpayers for tax years 2013-017.
  • In 2014, the IRS classified all virtual currencies as property for tax purposes, meaning the assets can be sold at a profit and trigger tax implications. The IRS served a summons against digital currency exchange Coinbase seeking details about customers that traded digital currencies from 2013 to 2015.
  • Other commentators have cited that taxpayers who received the letters from the IRS generally won’t be eligible for the voluntary disclosure program whereby taxpayers can contact the IRS with previously undisclosed financial accounts in exchange for the potential to reduce IRS penalties or avoid criminal prosecution. Additionally, taxpayers who believe they have tax reporting responsibilities could file amended tax filings, subject to statute of limitations rules, to properly restate transactions involving cryptocurrency.
  • Because cryptocurrency runs on sophisticated blockchain technology, for cryptocurrency transaction measurement (i.e., a tax gain or loss on sale), taxpayers need the ledger of every transaction between a purchase date and a sale date. This allows tax professionals to assisted clients with a gain or loss sale calculation for reporting purposes.

Because this continues to be a quickly evolving area of both finance and technology, “better safe than sorry” is the mantra. If you have a position in cryptocurrency, it is imperative that you check with your tax advisor regarding any cryptocurrency transactions you have undertaken.

Check out my recent interview in the NY Post on this topic.

About Timothy Speiss

Timothy Speiss is Co-Leader of EisnerAmper's Personal Wealth Advisors Group and Vice President of EisnerAmper Wealth Planning LLC. He chairs our Asia Practice and is a member of the firm’s community service group, EisnerAmper Cares.

* Required