What to Do If You Receive a 6174 Letter

There are few people who are excited to find they have received mail from the IRS.

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?

Receiving IRS Letter 6174 indicates that the IRS has received information that indicates you may be required to report transactions using or regarding digital assets. These letters are sent out to notify taxpayers of this requirement and to bring awareness to the recent updates regarding how digital asset transactions are reported.

What should I do now?

IRS Letter 6174 doesn’t require a response. As an informational notice, the purpose of the letter is educational rather than threatening. As long as you report any transactions involving digital assets correctly, you probably don’t need to take any further action.

It’s worth it, though, to double check your returns if you haven’t filed yet or review your filed returns to ensure they are accurate.

If you already filed your return but, after receiving Letter 6174, believe you may have unreported transactions, you may want to consider amending your return.

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.