For the second year within a row, the IRS [Internal Revenue Service] is again warning cryptocurrency investors they underreported their holdings. But it might be another false warning.
“Dozens of users” recently received notices that they owe taxes on gains from cryptocurrency holdings that they didn’t report when filing earlier in 2018, consistent with an official web-blog post published on Monday by tax software provider CryptoTrader.tax.
The head of the tax strategy at CoinTracker, Shehan Chandrasekera, added that he’d also heard of cryptocurrency investors receiving these letters this year.
The form CP2000 letters state what proportion the IRS believes the users owe and offer due dates for payment. However, the users likely never realized these gains, and don’t actually owe these funds, CryptoTrader.tax added.
However, similar letters were sent to crypto exchange users last year. At the reporting time, Justin Woodward, the co-founder of TaxBit, another software vendor, added that folks received letters because their exchange reported transactions to the IRS using form 1099-K. This IRS form reveals all transactions as generating revenue, even if some transactions actually resulted in a loss for the user.
Moreover, an exchange might report a dramatically inflated tax burden for the user. The letters sent earlier in 2019 were for the 2017 tax year.
The same issue appears to be occurring this year, consistent with CryptoTrader’s official web-blog post.
“These CP2000 cryptocurrency-related tax mishaps all stem from the very fact that Coinbase and other exchanges use Form 1099K to report cryptocurrency proceeds to the IRS. This is often a drag,” the blog post added.
According to a screenshot on CryptoTrader’s blog post, some Coinbase users are certainly affected. It’s unclear whether users from other exchanges are also receiving such letters.
Users who receive one among these forms should calculate their actual gains and losses, and report those to the IRS, the post added.
Exchanges could prevent this issue by sending 1099-B reports to the IRS, that accurately mark gains and losses, instead of the merchant-focused 1099-K forms, TaxBit’s other co-founder Austin Woodward revealed earlier in March.
At the reporting time, he added that “there was never any clear IRS guidance that [the 1099-K] was the right form.”
However, an official statement from the IRS and Coinbase has yet been published.
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