Regulation

IRS sends new letters to crypto holders, stating amounts they owe to the agency

Quick Take

  • The Internal Revenue Service (IRS) is sending out a new round of letters, notice CP2000, to cryptocurrency holders
  • Unlike the 10,000 letters the agency sent out last month, the new notice specifies the amounts individuals owe to the IRS 
  • Letter recipients can dispute the stated amounts, but failure to respond to the letters within 30 days may incur penalties  

The Internal Revenue Service (IRS) is sending out a new round of letters to cryptocurrency holders, this time listing the specific amounts of money that these letter recipients owe to the tax collector. 

The new IRS notice, CP2000, is intended for the occasion when there are discrepancies between the information taxpayers report on their tax return and the information the agency obtains independently from third parties. The amount stated on the notice is the proposed amount that the IRS believes the taxpayers owe, although taxpayers can dispute the amounts within 30 days of receiving the notice. The agency warns that failing to respond to the letter may incur further interest owed and penalties. 

In July, the IRS started sending out 10,000 educational letters to cryptocurrency holders, urging them to report and pay their cryptocurrency-related taxes properly. However, the CP2000 notice is believed to be separate from the 10,000 letters, according to CoinTracker co-founder Chandan Lodha, whose company provides software that helps taxpayers figure out their cryptocurrency-related taxes. 

“[CP2000] is more severe [than the previous 10,000 letters] in the sense that there is an actual, specific amount that the IRS is saying that is the proposed amount due, as opposed to… a very general warning letter,” said Lodha.  

On one CP2000 notice shared with The Block, the IRS obtained the third-party information that it uses to calculate the proposed tax amount from a Form 1099-K, a document some cryptocurrency exchanges send out to customers that have conducted transactions above certain thresholds. Exchanges are also required to file a separate copy of the same form to the IRS. 

However, some cryptocurrency taxation researchers pose doubts on the IRS’ methods of using Form 1099-K to calculate cryptocurrency-related taxes, since the form only reflects aggregated transaction volumes, but not the actual gains that individuals make through these transactions. 

“The 1099-K… isn’t really a good fit for reporting cryptocurrency tax information,” said Coin Center senior research fellow James Foust, who specializes in cryptocurrency taxation. “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 may be the reason exchanges have opted to use it in the absence of clear guidance from the agency.”  

It is unclear how many CP2000 notices were sent out at this time.