According to the IRS, cryptocurrency like Bitcoin is treated as property, not money. Notice 2014-21. Therefore, taxpayers who use it buy things or convert it to dollars are treated as having sold it, and have to recognize gain or loss based on what they receive when the dispose of it compared to what they paid for it.
In 2016, only 802 individual income tax returns reported cryptocurrency transactions out of the 132 million filed electronically. The IRS is clearly concerned about a lack of knowledge and/or intentional lack of compliance in this area. Late last month, it announced it is sending 10,000 warning letters to taxpayers it suspects of having owned cryptocurrency and not reporting.
The letters are of three variations, Letter 6173, 6174, and 6174-A. The 6173 will require a response from the taxpayer - either the filing of returns (delinquent or amended) reporting cryptocurrency transactions, or providing a statement to the IRS that he or she has fully complied with such reporting. Taxpayers are warned that if they ignore the letter, they may be subject to examination activity. The other two forms do not require a specific response, but warn about potential enforcement activity in the future. Taxpayers who receive the letter will likely have more difficulty in asserting an “ignorance” defense if future penalties for cryptocurrency transactions are ever imposed on them.
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