The IRS has finally gotten around to sending letters to crypto traders regarding failure to report these transactions on their returns.
Like any type of investment, trading coin must be reported, even if the activity was at part-time or amateur levels, such as an ordinary wage earner that happened to purchase and trade some Ripple and Bitcoin during the 2017 boom.
We started being approached with IRS letters regarding this in June of 2019 and by late July, the IRS published a statement that it will be sending an additional 10,000 letters to traders of cryptocurrency. Again, this includes ordinary persons that bought some coin and traded only several times, in some cases.
These will be CP-2000 series notices, the same type that is issued to persons for failure to report interest, dividends, or stock transactions from a regular brokerage.
Many were misled in 2017 to believing that trading crypto did not require reporting unless “cashed out” to dollars. This is not correct. Trading Etherium for Litecoin is tantamount to trading Microsoft for Apple shares. Both are required to be reported on schedule D [and if detail is required, 8949].
If you are caught in this situation, you should amend your return. Our recommendation is generally to amend even if you are not yet caught. This is because the IRS issues “substantial understatement penalties” if they flag the return. You will not be charged these if you come forward.
If you have left out crypto from your returns or if you have received a letter from the IRS, please contact us so we can assist right away. Many of our clients own cryptos and I do as well, so our experience is professional as well as personal.