IRS warns crypto traders once more about underreported income
For the second year in a row, the Internal Revenue Service (IRS) is warning cryptocurrency investors who have not adequately reported their holdings. But it can be another false positive.
According to a blog post published Monday by tax software provider CryptoTrader.tax, "dozens of people" recently received notice that they owe taxes on profits from crypto holdings that they hadn't reported when they filed in 2018.
Shehan Chandrasekera, head of tax strategy at CoinTracker, said he had also heard from crypto investors who received these letters this year.
The CP2000 form letters indicate how much the IRS owes users and indicate due dates. However, users likely never realized those gains and don't really owe those funds, CryptoTrader.tax said.
Similar letters were sent to Crypto Exchange users last year. At the time, Justin Woodward, the co-founder of TaxBit, another software provider, told CoinDesk that people had received letters because their exchanges reported transactions to the IRS using Form 1099-K. In this IRS form, all transactions are shown as generating revenue, even if some transactions have actually resulted in a loss for the user.
As a result, an exchange can report a dramatically excessive tax burden on the user. The letters sent in 2019 related to the tax year 2017.
The same problem appears to be occurring this year, according to CryptoTrader's blog post.
“These CP2000 cryptocurrency tax mishaps are all due to the fact that Coinbase and other exchanges are using Form 1099K to report crypto proceeds to the IRS. This is a problem, ”the blog post said.
According to a photo in the CryptoTrader blog post, at least one Coinbase user is definitely affected. It is unclear whether users from other exchanges will also receive these letters.
Users who receive any of these forms should calculate their actual profits and losses and report them to the IRS, the post said.
Exchanges could prevent this problem by sending 1099-B reports to the IRS detailing profits and losses, rather than the trader-targeted 1099-K forms, TaxBit's other co-founder Austin Woodward told im March opposite CoinDesk.
At the time, he said that "there was never any clear IRS guidance that (the 1099-K) was the correct form."
The IRS and Coinbase spokespersons did not immediately return requests for comments.