IRS Increases Warning Letters to Cryptocurrency Investors
In a notable increase, the Internal Revenue Service (IRS) has ramped up the distribution of warning letters to cryptocurrency investors, igniting concern within the crypto community. David Kemmerer, co-founder and CEO of Coinledger, suggests this rise in correspondence is a signal of impending enforcement measures, particularly as new regulations pertaining to Form 1099-DA are set to be implemented next year.
Types of Warning Letters
The IRS is primarily sending out Letter 6174, which is intended to be educational, serving as a reminder that earnings from crypto transactions may be subject to taxes. Interestingly, this letter does not imply that the recipient has committed any violations. However, additional letters, Letter 6173 and CP2000, have also been dispatched. Kemmerer explains that these letters carry more weight and can necessitate a quick response to avoid potential audits.
Kemmerer noted that many of those receiving Letter 6174 are ordinary investors flagged by the IRS through John Doe summonses directed at cryptocurrency exchanges like Coinbase and Poloniex. The CEO highlighted a growing sense of unease amongst affected individuals who have reached out for guidance.
“There’s considerable confusion and anxiety amongst everyday cryptocurrency investors, many of whom believe they’ve accurately reported their taxes,” Kemmerer stated. “With the introduction of Form 1099-DA on the horizon, we should expect a surge in enforcement actions. The IRS now has greater insight into cryptocurrency transactions, yet even those who are compliant could inadvertently find themselves flagged due to incomplete cost basis records. This highlights the necessity for investors to meticulously maintain their financial records and proactively track any taxable income.”
Understanding the Distinction Between Letters
On the distinction between the warning letters, Kemmerer elaborated that receiving Letter 6173 signals the IRS’s suspicion that the individual has underreported their income, compelling prompt action by the stated deadline. In contrast, a CP2000 letter typically indicates that the IRS has computed the tax owed, requiring a response within 30 days from the recipient.
Advice for Investors
For individuals who believe they have been wrongly accused of underreporting by the IRS, Kemmerer advises gathering relevant documentation that substantiates their original cost basis to challenge the agency’s claims. Looking ahead to the full implementation of Form 1099-DA in 2026, he predicts a significant uptick in IRS warning letters, emphasizing that failure to report income that coincides with 1099-DA disclosures could automatically trigger the issuance of CP2000 letters.
As the IRS intensifies its focus on cryptocurrency taxation, investors are urged to stay vigilant and informed about their reporting obligations.
