There are three variations of the IRS letters: Letter 6173, Letter 6174, and Letter 6174-A. These letters are generally educational in nature, and strive to help the taxpayer understand their tax and filing obligations and how to correct past errors. Some letters may require a response. If you receive a letter from the IRS regarding virtual currency and are not sure if any action needs taken, we would be happy to review the notice and respond if necessary.
Guidance for virtual currency treatment has traditionally been found at IRS Notice 2014-21.
For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency. Taxpayers are required to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt, and use this information to calculate gain or loss when virtual currency is later sold.
The IRS released additional guidance at Revenue Ruling 2019-24
on October 9, 2019. The new revenue ruling goes into further detail on issues facing virtual currency owners. Specifically, this revenue ruling addresses the treatment of virtual currency income as a result of a “hard fork” or “airdrop.” The general rule is that income is recognized if the taxpayer receives units of a new virtual currency following one of these events.
This new revenue ruling demonstrates the complicated nature of virtual currency transactions. If you have any questions on the tax implications of owning virtual currency, or if you have questions about your specific virtual currency transactions, please let us know. Virtual currency will be under increased scrutiny by the IRS in the years to come, and we can help you stay in compliance.