As part of it’s outreach efforts, the IRS is sending letters to some clients with virtual currency transactions advising them of potential failure to report income and pay taxes resulting from currency transactions or advising that transactions may have been reported improperly. 10,000 letters are supposed to go out before the end of August.
The names of the letter recipients were obtained through various ongoing IRS compliance efforts. You may recall there was a lot of press regarding the IRS “John Doe” subpoena last year that sought the records from Coinbase of U.S. taxpayers who conducted transactions in a convertible virtual currency during the years 2013 to 2015.
Nothing has been reported that I have seen stating how many other taxpayers might be in the IRS cross hairs for unreported transactions but I would guess tens or even hundreds of thousands of taxpayers will eventually be identified. Unreported income will be subject to taxes, penalties for late payments, potential substantial underpayment penalties, and interest back to due date of the return which should have included the transaction income. By the time the taxpayer is notified, penalties and interest could be substantial.
RAMIFICATIONS OF UNREPORTED INCOME AND LOSSES
Taxpayers who do not properly report the incme tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties and interest. Criminal prosecution is even possible in some cases.
It’s important to note that all taxpayers did not make money in currency transactions. Losses did occur often. Losses from currency transactions can only be claimed if filed within 3 years of the due date of the return for the tax year the losses were incurred. After that, any refund that might be due you is lost.
LOST OR NONEXISTENT DATA
What if your bitcoin records were compromised or are no longer available from defunct companies or ???
In that case, you will have to use whatever records you do have to recreate transactions. We see this kind of thing with stock sales where purchase might have been 20 years ago and there is difficulty in determining basis. You might want to seek help from someone knowledgeable in methods and tools needed to determine tax effects of currency transactions you may have carried out.
I’m sure we will be hearing much more about this in the near future.