IRS put more than 10,000 cryptocurrency taxpayers on notice

The Internal Revenue Service announced on July 26, 2019 that it had begun mailing letters to taxpayers whose virtual-currency transactions may have been omitted or reported incorrectly. The agency expected more than 10,000 taxpayers to receive one of three letter variants by the end of August.

The development mattered because it connected the IRS’s established position that convertible virtual currency was taxable property with an identifiable population of taxpayers. Cryptocurrency tax enforcement was no longer only a policy statement directed at the market as a whole. The letters showed that the agency was using information gathered through compliance work to question particular returns.

The IRS did not identify the recipients, disclose the complete selection methodology or say how many letters of each type it would send. It described the names only as having been obtained through “various ongoing IRS compliance efforts.” That limitation prevents a definitive claim about which exchanges or datasets produced the mailing list.

Three letters, different levels of scrutiny

The campaign used Letters 6173, 6174 and 6174-A. Although the IRS called them educational letters collectively, their practical demands were not identical.

Letter 6174 told recipients that the agency had information indicating they had or previously had one or more virtual-currency accounts but might not understand the reporting requirements. It encouraged correction of inaccurate returns but said no response to the letter was required.

Letter 6174-A used firmer language, stating that the recipient might not have properly reported virtual-currency transactions. It likewise did not require an immediate response, while warning that other enforcement correspondence could follow.

Letter 6173 was more consequential. Its June 2019 template said the IRS had not received a return, form or schedule reporting the recipient’s virtual-currency transactions for one or more tax years from 2013 through 2017. It required action by a specified response date. A taxpayer asserting compliance was asked for an account of the relevant facts and a signed declaration under penalties of perjury. The template said a nonresponse could lead to examination.

Those distinctions are important: receipt of any one version did not itself establish unpaid tax, fraud or a criminal offense. The letters reflected different levels of asserted concern and left room for recipients to explain previously filed reporting.

Property treatment meets exchange data

The legal foundation remained IRS Notice 2014-21. Under that guidance, convertible virtual currency was treated as property for federal tax purposes. A sale, exchange or other disposition could therefore produce a reportable gain or loss. The 2019 letter templates also treated exchanging one virtual currency for another, or spending it on goods or services, as a potentially reportable disposition.

The campaign followed an earlier institutional effort to identify cryptocurrency users. In November 2016, a federal court authorized the IRS to serve a John Doe summons on Coinbase for information concerning unidentified U.S. taxpayers who used the exchange during 2013 through 2015. That proceeding demonstrated the government’s ability to seek customer records without first naming every taxpayer. It is relevant background, but the July 26 announcement did not expressly attribute its full recipient list to Coinbase.

A targeted action in a quieter market session

The announcement arrived during a relatively subdued bitcoin session on one large U.S.-facing exchange. Kraken’s July 26 daily report listed bitcoin at $9,851, down 0.05%, with $82.3 million of BTC trading volume and $119 million across all reported markets on that venue.

Those figures are a Kraken-only daily report, not a consolidated global close, and the source does not supply a sufficiently precise cutoff time to treat them as universal market measurements. They nevertheless provide contemporaneous context: the tax-enforcement announcement, rather than an exceptional one-day bitcoin move, was the date’s more durable institutional development.

The verified record on July 26 supported a narrow conclusion. The IRS had begun a large, targeted compliance mailing and signaled that virtual-currency reporting would be backed by analytics, examinations and potentially stronger enforcement. It had not announced assessments against all recipients, reported money recovered or established wrongdoing by any particular taxpayer.