The IRS has been increasing their crypto tax compliance efforts lately, and thousands of taxpayers recently received cryptocurrency tax notices notifying them of potential non-compliance. Getting a letter from the IRS is always unsettling, but below we describe what these letters mean, and how to respond.
What Are IRS Letters 6173, 6174 & 6174-A?
The IRS recently began sending these “warning” letters again to crypto holders as part of its Virtual Currency Compliance Campaign. These letters were previously sent out in bulk in 2019, but after some recent subpoenas by the IRS, they are back again.
In short, these tax notices let taxpayers know that their crypto activity may not be properly reported, and they are used by the IRS to encourage compliance. If you received one of these letters, below is a breakdown of what each type of letter means, and what actions are required:
Quick Summary (in order of severity)
Letter 6174: Informational only. No IRS follow-up expected.
Letter 6174-A: No immediate action, but the IRS may follow up.
Letter 6173: Most urgent. Requires a response in 30 days.
Letter 6174
What is it?
This letter lets you know that the IRS knows that you have crypto. It asks you to check your returns, and if necessary, file amended returns to correctly report your crypto transactions.
Action Required
If you have already reported your crypto gains, losses, and income on your previous returns, there is no action needed. If not, you should amend any returns that are within the statute of limitations (generally the last three years, but potentially up to the last six years if the amount that was underreported was more than 25% of your income that year).
IRS Action
The IRS does not intend to follow up on these notices.
Letter 6174-A
What is it?
This letter is similar to 6174, but it states that there is a potential misreporting of your crypto transactions, and means that you have been identified as a noncompliant taxpayer.
Action Required
There is no immediate response required, and no action needed if you are in compliance, but if not, you should amend any returns that are within the statute of limitations (generally the last three years, but potentially up to the last six years if the amount that was underreported was more than 25% of your income that year).
IRS Action
This notice states that the IRS may follow up with future notices or audits.
Letter 6173
What is it?
This letter is the most urgent, as it identifies you as being non-compliant and it demands a response within 30 days.
Action Required
If you received this letter, you will want to calculate your gains, losses, and income to date, and amend your previous tax returns as soon as possible to avoid an audit. If you need more than 30 days to respond to this notice, you can request an extension by calling the IRS.
IRS Action
The IRS intends to follow up on these responses to ensure compliance.
Things to look for when reviewing your previous years’ returns
Even if you have reported crypto on your tax returns in the past, it is possible that you are still not fully compliant. Be sure to check the following, as these are commonly missed:
- Did you report all sales, trades, and spends of crypto?
- Did you report DeFi transactions?
- Did you report NFT profits?
- Did you report mining & staking income when they were received?
- Did you report rewards & crypto interest when they were received?
- Did you check “yes” to the crypto question on the tax return?
- Did you receive any 1099-MISC or 1099-B forms from exchanges that did not get reported?
- Did you report crypto gains and losses with box C & F checked (for wallets and exchanges that did not provide you with a 1099?)
- Did you apply the net investment income tax to crypto investment income?
- Did you report income you received in crypto?
- Did you report crypto margin income from options, derivatives, and futures?
How to prepare a crypto tax report
In order to be in compliance with your crypto transactions, you will need to consolidate all of your transactions across all of your exchanges and wallets, reconcile the transactions, and then calculate the gains/losses and income for each year. We recommend using crypto tax software like Cointracking or Koinly, and/or working with a crypto tax accountant, like us. We have over 1,500 clients and are currently accepting new clients. We would be happy to help with this!
How to file an amended return
Prepare a Form 1040-X with an accountant (or in a DIY software like TurboTax), and add your crypto transactions. Include a description in Part II explaining why you are amending your return, and write the type of tax notice you received (e.g. “Letter 6174”) at the top of the first page of the return. If you need any help with this, let us know! We have filed over 200 amended returns, and to date, none of our clients have been audited in connection with these corrections.
Next steps
If you received one of these letters, and need help, feel free to schedule a consultation here, or email us at hello@cryptotaxgirl.com. Getting a letter from the IRS is always unsettling, but we have helped many of our clients calculate their crypto gains/losses and income, file amended returns, and respond to these letters, and we would be happy to help you too!