IRS 6174 Letter: Report Digital Assets and Virtual Currency

IRS 6174 Letter: Report Digital Assets and Virtual Currency

What Is IRS 6174 Letter?

If you receive Letter 6174 from the IRS, this means the IRS believes you did not report digital assets or virtual currency transactions, like cryptocurrency gains, and requests that you amend your return. Taxpayers can consider an IRS 6174 notice as a friendly reminder of potential problems with reporting (or not reporting) digital assets and virtual currency. This includes NFTs and crypto, on their latest tax return.

How Should You Respond to IRS 6174?

Failing to amend a federal tax return that did not include information about digital assets and virtual currency, including crypto gains, will ultimately result in the IRS contacting the taxpayer and possibly owing penalties and interest on unpaid taxes.

The best thing a taxpayer can do to avoid IRS penalties and back taxes is to file an amended tax return or contact the IRS to dispute their 6174.

What Does the IRS Consider to Be Digital Assets and Virtual Currency?

The IRS defines digital assets and virtual currency as all “digital representations of value” that have been stored on cryptographically secured ledgers. Digital assets include stablecoins, non-fungible tokens (NFTs), and convertible cryptocurrencies (Bitcoin, Altcoins, Ethereum, Binance, etc.).

A convertible virtual currency is any digital asset that carries a value equivalent to government-backed physical currency (coins, bills, notes). Cryptocurrency can be traded with other crypto holders and used to pay for services or goods from companies that accept cryptocurrency transactions.

Stablecoins, like USDC, operate exclusively on the Ethereum blockchain. Stablecoins are a different type of cryptocurrency that are not meant to experience the fluctuating value associated with Bitcoin and altcoins.

How Do You Report Digital Assets and Virtual Currency Transactions on Your Tax Return?

Examples of crypto transactions the IRS expects taxpayers to report include but are not limited to:

  • Selling digital assets for the purchase of other digital assets
  • Trading or exchanging digital assets for other digital assets
  • Exchanging digital assets for services, goods, or property
  • Obtaining digital assets through “staking” or “mining” activities
  • Transferring or receiving digital assets for free if this transfer or receipt does not qualify as a gift

The IRS expects cryptocurrency platforms and exchanges to keep customer information involving the trading, selling, and/or exchanging of cryptocurrency. The IRS uses information such as a customer’s capital gains or losses, gross proceeds from selling digital assets, and how long a customer held onto a specific cryptocurrency, to issue 1099-Bs at the end of a tax year.

What Happens If You Don’t Report Cryptocurrency, Stablecoin, or NFT Transactions to the IRS?

Digital assets that are sold or exchanged at a profit must be reported to the IRS. Cashing out cryptocurrencies and receiving any amount of U.S. money in exchange should be reported as well. The difference between a loss or gain depends on the purchase and selling price of digital assets, individual tax rates, and how long a person actually owned the cryptocurrency.

Some of the IRS 2022 Federal Income Tax Brackets for short-term (one year or less) cryptocurrency holdings include:

  • 12% tax rate for single taxpayers earning between $10,276 and $41,775
  • 22% tax rate for single taxpayers earning between $41,776 and $89,075
  • 32% tax rate for single taxpayers earning between $170,051 and $215,950

There are also different digital asset and virtual currency tax rates for people who are married and filing jointly, married and filing separately, or filing as head of household.

What’s the Difference Between IRS Letters 6174, 6174-A, and 6173?

IRS Letter 6174

If the IRS has information that a taxpayer neglected to report capital gains involving digital assets, they will initially send out a 6174 letter. This is an early warning letter explaining tax rules regarding digital assets. The IRS expects taxpayers receiving a 6174 to respond in a timely manner.

IRS Letter 6174-A

IRS letter 6174-A will be mailed to taxpayers who do not contact the IRS or amend their tax return several months after receiving letter 6174. This letter contains the same language found in 6174 except for the following statement at the end of the letter: “we may send other correspondence about potential enforcement activity in the future.”

IRS Letter 6173

Ignoring letters 6174 and 6174-A means you will eventually receive letter 6173. This letter states that the IRS has definitive information about your digital asset transactions. In other words, they have proof that a taxpayer either deliberately or inadvertently filed incorrect tax returns that omitted digital assets, including cryptocurrency.

If a taxpayer does not respond by the date indicated in letter 6173, the IRS will refer your tax return to an agent for further examination. Underpaying what you owe the IRS due to capital gains via digital assets is considered a back-tax debt. These back taxes are subject to the same penalties and interest as other tax debts.

How Can Wiztax Help?

If you owe back taxes and need help understanding your options, schedule a free call or get started below. When it comes to IRS debt, its always best to get started as soon as possible – and we can help! As noted above, it is critical to review and respond to IRS notices quickly, before the issue escalates.

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