Photo Credit To Patrick Walter Via Flickr

In a recent news bulletin, the US IRS announced that it had started sending letters to crypto holders. The letter advises them to pay back taxes they may owe. Alternatively, they may file amended tax returns to include any crypto assets in their possession. The IRS plans to send out over 10,000 such letters.

How the IRS Got Its Data

The IRS says that it acquired information about crypto holders via various compliance methods. These methods included John Doe summons to providers of virtual wallet services and other people that use crypto. The letters are only targeted at those who did not include their crypto transactions in their tax returns. 

What the Guidelines Say

The existing IRS guidelines state that losses or gains form crypto assets have to be reported just like any other exchange or sale of a property. Chuck Rettig, the current commissioner of the IRS has encouraged those who get the letters to take them with the seriousness they deserve. Failure to comply can lead to various penalties that include criminal prosecution, fines, incarceration, and loss of various privileges for being a convicted felon. 

How the IRS Can Find You

When you use Bitcoin, you should technically be anonymous. Thus, you can avoid paying taxes. However, if you have ever bought Bitcoin, you most likely did it through an exchange. These exchanges have strict KYC rules, which ensure they have your personal identifying information. 

The IRS even managed to win a case against Coinbase. The victory meant they could access user data deposited with Coinbase. It is most likely one of the methods they used to find those who had not complied with tax guidelines. 

However, paying Bitcoin is not as straightforward as it might seem. While the IRS classifies crypto as property, those who own crypto coins feel that they are currencies or investments. When you pay taxes on crypto, it might also mean you have to pay capital gains taxes. This is where the problem arises. For instance, when you buy a painting by Picasso, you can expect to sell it later for a 20-30% profit. However, this is not the case with crypto. When you use Bitcoin to buy another cryptocoin and then convert the new coins into Bitcoin and then use that Bitcoin to buy a property such as a car, treating the coins as property can lead to some tricky maths. 

Lack of Clear Regulation

The IRS has received a lot of criticism in recent years for failing to update crypto guidelines. However, recent reports indicate that the IRS may soon update its guidelines. This would be the first time it does so since 2014. 

What about those that did not get the Letter

Even those who did not get the letter should consider filing tax returns that include their crypto holdings. For those who make corrective filings, the IRS is also quite forgiving. However, once they launch an audit or investigation, it does not often end well. Keep in mind that crypto is an area of focus for IRS Criminal Investigation. 

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