What to Do If You Receive a 6174-A Letter

There are few people who are excited to find they have received mail from the IRS – especially mail that says “you may have done your taxes wrong”.

You may be used to including your W-2 income, 1099s and other income on your annual tax returns but, as of 2014, virtual currency transactions must also be reported on your return as property. In 2019, the IRS clarified the reporting procedures and included a mandatory digital assets question on personal tax returns.

Why did I get an IRS Letter 6174-A?

Receiving IRS Letter 6174-A indicates that the IRS has identified potentially unreported digital asset transactions. The IRS has information that you may have engaged in crypto transactions that were not reported or were reported incorrectly. While it isn’t a threat of further action, it is not purely informational (like Letter 6174). You should take action.

What should I do now?

The IRS does not require a response but inaction is risky. How you respond depends on your situation. The first step is to determine your reporting obligation and review your actions to date:

If you did not file a return, you should file your return with accurate reporting of crypto income

If you filed an inaccurate or incomplete return, you should file an amended return to correct any concerns.

The Digital Asset Question

Beginning in 2019 federal returns for individuals, partnerships, corporations, and estates/trusts, the has IRS included variations of the following question:

At any time during [tax year], did you:

(a) receive (as a reward, award or payment for property or services); or

(b) sell, exchange or otherwise dispose of a digital asset (or a financial interest in a digital asset)?

What are considered virtual currency and digital assets?

According to an IRS Fact Sheet, “A digital asset is a digital representation of value that is recorded on a cryptographically secured, distributed ledger or any similar technology”.

Digital assets include:

• Cryptocurrencies (Bitcoin, Litecoin, etc)
• Stable Coins (USDC, DAI, etc)
• Utility or DeFi tokens
• Non-fungible tokens (NFTs)

When am I required to report digital assets?

If you own digital assets but did not acquire or dispose of any digital assets during the calendar year, you are not required to report them on your return. You are also not required to report the transfer of digital assets between multiple accounts owned by you. Additionally, the purchase of digital assets using USD or other real currency is not reported.

Transactions using virtual currency are required to be reported on your federal tax return each year. You should check “yes” for the digital asset question if you:

• received digital assets as payment for property or services
• received digital assets as a reward
• received digital assets from mining or staking
• received digital assets from a hard fork
• disposed of digital assets in exchange for property or services
• disposed of a digital asset in exchange for another digital assets
• sold a digital asset
• disposed of any financial interest in a digital asset

Because the IRS considered digital assets property, property tax principles apply.

What happens if I ignore the 6174-A letter?

Although Letter 6174-A does not require a response, failing to correct issues identified in the letter could expose you auditing, penalties, interest charges, or criminal charges for noncompliance.