United States: Did You Report Your Virtual Currency Transactions Properly? IRS Is Watching, And Asking

Last Updated: September 25 2019
Article by Philip Liotta and Michael A. Gillen

The Internal Revenue Service (IRS), through the use of data analytics and more likely through a summons issued to Coinbase, Inc. account holders (more on this later), is increasing its focus on the virtual currency industry by sending letters to taxpayers to ensure they are accurately reporting virtual currency/crypto transactions (think Bitcoin, among others). Even if you reported properly, you may still receive a letter, as some information reported to the IRS from the currency exchanges may contain inaccuracies. A letter from IRS is never a welcome surprise in the mail. The IRS reported that more than 10,000 letters were issued over the summer. Taxpayers receiving these letters have been targeted one way or another and may have failed to properly report income and pay the resulting tax from virtual currency transactions. By latest reports, the overall size of the crypto market is estimated at more than $150 billion, including value of blockchain companies, so it's no surprise that the IRS has an interest.

Under current law, effective in 2014 when the IRS issued Notice 2014-21 (which is a concise FAQ providing guidance on how virtual currency transactions will be taxed in the U.S.), virtual currency is treated as "property," with income generated by the trading of virtual currency taxed as a capital gain, at either short-term or long-term rates, for the taxpayer not in the trade or business of professional trading. If the taxpayer is a professional trader, the gain would be taxed at ordinary income rates as trade or business income. Pretty straightforward if you converted U.S. dollars to Bitcoin and then converted the virtual currency back to U.S. dollars for a profit. But what happens if instead, you use appreciated Bitcoins to purchase a new car, desk or HD television? In this instance, such transactions are treated as if the Bitcoin had been converted back to cash in a deemed sale, and the gain would be taxed as capital gain or ordinary income depending on the professional/nonprofessional status of the owner. Not many taxpayers are aware of this treatment and properly report the income. This is the win for the IRS.

Additionally, a taxpayer operating a business that receives payment for goods or services in the form of virtual currency must include in gross income the fair market value of the virtual currency, in U.S. dollars, at the time the virtual currency was received.

If the value of the currency at the time of sale, for accrual basis taxpayers, is different than at the time of collection, a gain or loss on sale must be recognized.

Furthermore, virtual currency received as payment for services constitutes wages for employees and self-employment income for independent contractors, and is subject to applicable withholding and information reporting requirements.

As with any item of income or deduction, the recordkeeping responsibility to properly calculate gain or loss on trades of virtual currency is the taxpayer's burden. Unlike with most other investments, taxpayers are not provided a Form 1099 at year end displaying cost basis and selling price to determine gain or loss. Fortunately, several software packages have been developed to assist taxpayers in maintaining accurate records relating to their virtual currency transactions.

Since the use of virtual currency in everyday transactions is increasing and the concept is relatively new, the IRS is concerned that taxpayers trading or receiving virtual currency as a form of payment, as well as engaging in investment and trading activities, may be improperly reporting these transactions or not reporting them at all. According to IRS chief of criminal investigations Don Fort, virtual currencies pose a "significant threat" to collection efforts. As a result, the IRS is becoming more vigilant, with increasing focus on the development of new and heightened examination strategies surrounding virtual currency transactions. Fort also indicates that in the near future, the agency plans to announce criminal tax evasion cases centering around virtual currency.

Through increased use of data analytics and, we believe, information possibly collected from court-authorized John Doe summons (which does not identify the subject of the summons and is authorized by IRS, with approval from the court) to Coinbase account holders, IRS was able to target potential noncompliant taxpayers. IRS Commissioner Charles Rettig warns, "If you get a letter, and your name is on the letter, and it's your home address or the address that matches your tax return, and it's from IRS, and it's encouraging you to maybe take a second look at your return, one might assume we had information." Bottom line, if you get a letter, contact your tax adviser instead of attempting to reply to an IRS inquiry on your own.

What Letter Did You Receive?

Three different versions of the "education" letters were issued:

1. Letter 6173. Issued to taxpayers when, for one or more tax years between 2013 and 2017, IRS has not received either a federal income tax return (which may be an entirely separate and possibly a more serious issue) or an applicable form or schedule reporting the taxpayer's virtual currency transactions, while the information provided to IRS from a virtual currency exchange reports transactions attributable to the taxpayer.

2. Letter 6174. Issued to taxpayers when IRS has information that the taxpayers have or had one or more accounts containing virtual currency but may not have known the requirements for reporting transactions involving virtual currency.

3. Letter 6174-A. Issued to taxpayers when IRS has information that the taxpayers have or had one or more accounts containing virtual currency but may not have properly reported the transactions.

Each version attempts to "educate" taxpayers of their filing. However, the letters have varying tones. Letter 6173 is the most demanding of the three. By a date specified in the letter, it requires either the submission of any unfiled tax return(s), filing of amended return(s) or for the taxpayer to certify under penalties of perjury that all tax reporting requirements relating to virtual currency were followed. If the taxpayer fails to respond by the date specified, the audit risk will increase. Letters 6174 and 6174-A are more informational in nature and do not require a response, however, if your virtual currency transactions were not reported properly, you should amend your tax returns as quickly as possible.

TAG's Perspective

Despite Notice 2014-21 and the trend that virtual currency tax reporting is rapidly becoming a primary focus of current IRS compliance initiatives, there are many unanswered questions. For example, do the wash sale rules apply to loss transactions? Are virtual currency accounts required to be reported as foreign accounts on either IRS Form 8938, Statement of Specified Foreign Financial Assets, or FinCEN filings?

If you receive any type of correspondence from IRS, it is imprudent to ignore it. Do not respond directly. Comprehensive and thoughtful assessment is crucial. Whether investing, trading or purchasing goods and services, it is critical to maintain detailed records to ensure proper tax reporting and appropriate support in the event of an IRS inquiry. Don't plan to rely on the traditional Form 1099 investment reports (as you will not receive one). However, you will receive a Form 1099-K from your third-party virtual currency network (Coinbase, etc.) if you received payments of $20,000 or more or if you engaged in more than 200 virtual currency transactions. As the world of virtual currency and related legislative activity continues to develop, as always, we are available to discuss the impact of a new or pending tax law on your personal or business situation.

For Further Information

If you would like more information about this topic or your own unique situation, please contact CPAs Philip Liotta, Michael A. Gillen or any of the practitioners in the Tax Accounting Group. For information about other pertinent tax topics, please visit our publications page.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions