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Sold cryptocurrency lately? You may soon hear from the IRS.

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If you had a virtual currency transaction in the past few years and didn’t report it, the IRS may likely contact you.

By the end of August, the IRS will have sent notices to more than 10,000 taxpayers who had virtual currency transactions, but who may not have reported or paid federal income tax on gains from those transactions. If you get one of these letters, you may need to file or amend a return to report your cryptocurrency gains.

Want to learn more?

Why is the IRS cracking down on crypto owners?

The move is part of an ongoing IRS campaign to ensure taxpayers who are in virtual currency markets properly meet their tax obligations.

“People who get these letters could actually owe the IRS additional tax,” says Julie Magee, director of tax regulatory affairs for Credit Karma. “The IRS didn’t pull names out of a hat. They use information from third parties and reports they must file to identify taxpayers who may have taxable transactions.”

Who could get a letter?

The IRS treats virtual currency (also referred to as cryptocurrency) like property. That means any income you make from bitcoin or other virtual currencies gets taxed like a property transaction, rather than at normal income tax rates. This applies whether you sell or exchange cryptocurrency, or accept it as payment for goods or services.

If you had a potentially taxable virtual currency transaction for one or more of tax years 2013 through 2017 and didn’t report it on your federal income tax return for that year, you might get one of these letters.

Why does this matter?

A November 2018 Credit Karma survey of more than 1,000 Bitcoin investors found that 53% planned to report their Bitcoin gains or losses on their 2018 federal income tax returns, which were due in April 2019. Most who didn’t plan to report transactions said they thought their gains or losses were too small to report, and more than a third didn’t think they were required to report them.

But generally, all your income is taxable unless tax law specifically says otherwise. You’re required to report all taxable income on your federal income tax return and pay any tax that may be due on that income. And even income that’s not taxable may need to be reported on your tax return.

Failing to properly report income earned from virtual currency transactions on your tax return could mean you end up owing additional tax, interest and even penalties.

What should you do if you get a letter from the IRS?

The IRS is sending three different versions of the letter, and all three include information on what actions you might need to take. Some possible actions are …

  • File a return reporting the transaction if you didn’t already do so
  • Amend a return if you didn’t report a transaction
  • Mail or eFax the IRS with an explanation of why you believe you followed reporting requirements for your virtual currency transactions

Ignoring the letter is not a good idea. At least two versions of the notice warn that not acting may mean your tax account gets referred for examination or that you may hear more from the IRS in the future about “enforcement activity.”

And, speaking at an IRS Nationwide Tax Forum in New Orleans on Aug. 6, 2019, IRS Commissioner Charles Rettig cautioned tax professionals to discourage their clients from ignoring the letters.

“I’ve read comments from people that say ‘These are just a fishing expedition. You don’t have to do anything,’” he said. “Good luck. As IRS commissioner, I would suggest those people might want to look at their returns.”

And of course, if you do have unreported and potentially taxable virtual currency transactions, acting sooner rather than later is best.

“Penalties and interest can continue to grow, so avoiding or delaying action is a big mistake,” Magee says. “The faster one can file or amend, the better off they will be in the long run.”

About the author: With nearly 30 years of experience in media, marketing, public relations and journalism, Evelyn’s written about nearly everything — from newspaper accounts of salacious capital murder trials to whitepapers on what typ… Read more.