IRS sending crypto traders tax bills they don’t owe

The United States Internal Revenue Service has been sending inaccurate letters to local cryptocurrency traders, according to crypto tax filing service CryptoTrader.Tax. 

On Nov. 23, the firm reported one its users received a worrying notice from the IRS. The document in question was a CP2000 Notice claiming that he had underreported his 2018 income to the tune of $250,000 by failing to include his cryptocurrency investing activity on his taxes.

The consequences of the inaccurate reporting can be substantial.

“As a result of this under-reporting, the IRS claimed John owed $127,000 in taxes and penalties,” the company said.

Fortunately, according to CryptoTrader.Tax the notice “was completely inaccurate” and the user “was actually owed money by the IRS as he had incurred $2,000 of cryptocurrency investment losses that year.” 

Furthermore, this user’s experience was apparently not an isolated incident. “Unfortunately, [he] was not alone in receiving a CP2000 letter,” the company said. “In the past two days, we have been contacted by dozens of individuals who received the same Notice from the IRS.”

CryptoTrader.Tax explains that the reason is that crypto exchanges such as Coinbase send 1099-K forms listing all of its user’s trades to the IRS. Still, this kind of form was meant for companies that pay their users directly, instead of crypto trade reporting, so the IRS interprets all trades as gross proceeds instead of calculating gains and losses. The announcement explains:

“Instead of reporting gains and losses (which are the real numbers you need for tax reporting), 1099-K sums up all of your trades and sells that happened within your Coinbase account and reports that number to the IRS. This makes it look like you had huge amounts of unreported income on your tax return.”

The IRS has been aggressively pushing to obtain user data from crypto exchanges, and under that pressure those companies may not have established the best data reporting standards possible. As Modern Consensus recently reported, Coinbase has received thousands of requests from U.S. agencies—and urges users to get their tax affairs in order.

CryptoTrader.Tax suggests that cryptocurrency traders who receive similar notices talk with a tax advisor.

Fortunately, the solution to the problem should be easy enough, the firm said.

“The misunderstanding can likely be resolved by drafting a simple response letter to the IRS explaining the situation and proving to them what your actual gains and losses were.”