• IRS is sending out letters to crypto holders stating how much money they owe the agency.
  • Failure to respond to the notice within 30 days will result in penalties.

The Internal Revenue Service (IRS) has been sending out letters to cryptocurrency holders listing the amount of money that these holders owe to the tax collector. The notice, called CP2000 is intended for situations where there's a discrepancy between the information on taxpayers' reports and the data obtained by the tax authority independently from third parties. The amount stated in the notice is the money that the IRS believes the users owe it. However, taxpayers can dispute the amount within 30 days of receiving the notice. The tax authority warned that failure to respond to the notice may result in further interest owed and penalties. 

Notably, in July, the IRS had sent out 10,000 educational letters to crypto holders urging them to pay their cryptocurrency-related taxes. Chandan Lodha, co-founder of CoinTracker, a company providing software that helps taxpayers understand their crypto-related taxes shared his view on the same. He said: 

"[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."

On one CP2000 notice that was shared, the IRS had obtained the third-party data that it uses to calculate the proposed tax amount from a Form 1099-K. This is a document sent out by some crypto exchanges to its users who have conducted transactions above certain thresholds. Exchanges are also required to file a separate copy of the same form to the IRS.

As the form only reflects aggregated transaction volumes, but not the actual gains that users make through these transactions, some crypto taxation researchers are against the IRS' methods of using Form 1099-K to calculate crypto taxes. 

“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.” 

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