Tax Expert: IRS Letters Confirm That Trading Cryptos Is a Taxable Event

The U.S. Internal Revenue Service (IRS) announced on July 26 that 10,000 American cryptocurrency users will receive a letter reminding them to pay taxes or amend any mistakes on past filings. At the time, IRS Commissioner Charles Rettig said U.S. taxpayers should take the warning letters “very seriously.” Sean Ryan, CTO of Node40, a platform that helps people calculate digital currency-based taxes, believes all three letters make it clear that exchanging one cryptocurrency for another is a taxable event.

Also Read: 10,000 American Cryptocurrency Owners Will Receive Warning Letters From the IRS

IRS Believes the Tax Agency Is Ahead of the Curve When It Comes to Cryptocurrencies

When the IRS announced that it was sending 10,000 letters to American taxpayers who own or have once owned cryptocurrencies, the digital currency community seemed shocked. That said, many crypto proponents, lawyers, and tax accountants expected the action after the IRS told the public in May that updated tax guidelines concerning cryptocurrencies would be made available soon. Then, in mid-June, IRS agent Gary Alford, a man who helped take down the Silk Road marketplace, told the press that the IRS is ahead of the curve when it comes to understanding how digital currencies work and Americans who dodge capital gains won’t get away with it for long.

“We’re usually behind the curve — history is made and then we react to it. But in this case, we are ahead of the curve — We were there on ground zero, and we were waiting for the rest of the world to catch up to what we already knew,” Alford said speaking at on a panel on June 13 at the Columbus Citizens Foundation townhouse. “We already are aware that there were cases to be made, we just didn’t know if we were at the point where we can bring it for criminal prosecution.” Alford further told the crowd that people who own bitcoin usually tell people about it and if they tell their accountant that they never heard of bitcoin then it’s the IRS’ “burden to show this individual knew.”

Node40 Executive Believes the IRS Letters Clarify Exchanging One Crypto for Another Is Taxable

A little more than a week later after Alford’s speech, the IRS published a press release detailing how three types of letters would be delivered to 10,000 U.S. cryptocurrency owners. The CTO of the crypto-centric tax company Node40, Sean Ryan, inspected the letters and found one possible clarification nobody is talking about. Ryan spoke with news.Bitcoin.com in June and he said that clarified tax guidance from the IRS was “long overdue.” The announcement in regards to the new IRS letters followed our interview with Ryan so we spoke to the tax expert again.

“There is something that I haven’t seen covered in the news yet,” Ryan explained. “As we know, the IRS hasn’t answered several outstanding questions about the nuances of paying taxes on crypto. Yes, they’ve issued the 2014 memo but we all know it lacks clarity on certain points – chief among them is the like-kind rules. Section 1031 of the IRS code before the new tax law went into effect in 2018 could have been (and was by some) interpreted to allow for an exchange of one digital currency for another, like buying ETH for/with BTC — tax-deferred. There has been much debate about this among accountants and tax attorneys with valid arguments on both sides.”

But after reading Letter 6173, 6174 and 6174-A, Ryan thinks the IRS snuck a certain clarified rule within the three notices. “If you read the IRS Letters, all three contain a statement making clear that the exchange of one currency for another is taxable,” Ryan stressed. The Node40 executive added:

This might be the first time the IRS has publicly stated such guidance and it came across to me as a bit sneaky. The reality is it has major consequences for those traders who were operating under the belief that any gains could be deferred under the transfer of property rule. It seems unfair to me to call someone out for not properly paying tax while at the same time making clear a point of much deliberation.

Node40’s website is telling the American public that the company can help people who were served with the IRS letters concerning virtual currency transactions.

Tax Litigation Firms Warn Crypto Owners: ‘Seek an Attorney Before Disclosing Anything to the Government’

Following the tax agency’s press release, an alleged former IRS agent told the Reddit community on the subreddit r/cryptocurrency that the letters are just a “broad and very error-prone fishing expeditions.” Unfortunately, there was no way the r/cryptocurrency forum visitors could confirm whether the person was really an IRS agent or someone just playing a hoax. However, quite a few forum participants believed the post was legitimate and agreed when he said the letters were predatory. “It strikes me that this [cryptocurrency] letter writing campaign, in particular, is very unethical, as they’re blindly scaring thousands of people shitless who very well may have done absolutely nothing wrong,” the supposed former tax agent wrote.

All three letters have different meanings as Letter 6173 requests a signed response from the taxpayer in regards to alleged noncompliance. Letter 6174 simply asks the taxpayer to review their past returns and, if necessary, file an amendment. IRS Letter 6174-A notifies the taxpayer that there is potential misreporting concerning cryptocurrency transactions and the IRS may enforce criminal prosecution. It’s safe to say many Americans were alarmed by the IRS announcement and some people claim they have already received a letter and penalty quotes. Tax attorneys are already advertising online to help crypto owners if they received one of the three IRS letters. For instance, the law firm Frost & Associates LLC is now advertising to help those who are dealing with cryptocurrency tax audits and IRS Letter 6173, 6174, and 6174-A.

“Cryptocurrency compliance investigations may also turn into larger, criminal tax investigations,” Frost & Associates website details. “These situations can be a massive intrusion into your personal and professional life and your accountant could be compelled to tell the IRS everything you’ve told him or her because the “accountant-client privilege” does not extend to criminal investigations or state tax proceedings.” The litigation firm further warns:

If you believe you’re a target of a cryptocurrency tax investigation from the IRS, then you should immediately contact a tax attorney before disclosing anything to the government.

What do you think about the IRS sending letters to more than 10,000 American taxpayers? Let us know what you think about this subject in the comments section below.

Image credits: Shutterstock, Node40, Sean Ryan, IRS, New York Times, Pixabay.

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