In addition to earlier letters, the U.S. Internal Revenue Service (IRS) is now warning investors who’re already filed their income tax but reportedly misrepresented the income generated from crypto transactions.
IRS Sends New Round of Letters
As Coingape reported, IRS in July sent 10000 educational letters to crypto users, asking them to report and pay their tax properly on the income from their virtual currency holdings. Unlike the earlier letters, the new notices, CP2000, specify that the agency encountered a difference in the amount of income that investors filed as part of tax filing. Accordingly, the agency seeks to collect the difference amount from a few crypto holders who misreported income from exchange transactions. To note, the agency gathered this information independently from the third party.
Upon receiving this notice, investors can dispute the amounts within 30 days; failing to respond would result in penalties. As per the Chandan Lodha who is the co-founder of CoinTracker, a firm that helps taxpayers to ascertain their crypto-related taxes states that;
“[CP2000] is a slightly different letter, Lodha said. “Basically what it says is ‘hey we have a report from one of the financial institutions you use and the amount they reported to us the IRS is different than the amount you, the taxpayer, reported and this is the amount you owe’ and it’s a 30-day letter meaning you have to respond in 30 days.”
Lodha also reveals that this letter usually circulated outside of the crypto space and this is the “new phenomenon” that IRS is sending out within crypto space this time. However, according to Justin Woodward who is an attorney with TaxBit tax calculating startup, these letters have been around crypto users since August. In case if the recipient disagrees with the IRS’s consideration of sending these letters, they can ask their financial institutions to resend a “correct statement. On a similar note, Lodha outlines;
“In terms of how the actual dynamic works, first they send you the CP2000, they send the proposed amount due and you say ‘yes, I’ll pay that’ or ‘no, and here’s the supporting documentation.’”
IRS obtained the discrepancies in an amount from the third party that calculates crypto-related tax via a “Form 1099-K” which is the same document that crypto exchanges shares to customers after conducting transactions. Agency urges exchanges to file a separate copy of the same form. The so-called, 1099-K form is not well-received by few researchers as it only reflects aggregated transaction volumes. According Coin Centre senior research fellow James Foust said the form will not calculate the actual gains that users make through crypto transactions.
“The 1099-K… isn’t a good fit for reporting cryptocurrency tax information but it [1099-K] and the 1099-MISC are the only information reports that the IRS mentions in Notice 2014-21 and I suspect that maybe the reason exchanges have opted to use it in the absence of clear guidance from the agency.”
Disclaimer The views, opinions, positions or strategies expressed by the authors and those providing comments are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of CoinGape. Do your market research before investing in cryptocurrencies. The author or publication does not hold any responsibility for your personal financial loss.
Tabassum is a full-time content writer at Coingape. Her passion lies in writing and delivering apt information to users. Currently, she does not hold any form of cryptocurrencies. Follow her on Twitter at @Tabassumnaiz and reach out to her at Tabassum[at]coingape.com