The Internal Revenue Service (IRS) has signaled for years that it would eventually bring enforcement actions against individuals who failed to report cryptocurrency gains. It appears that "eventually" is over and that those actions are underway.

Late last month, news reports indicated that the IRS had begun sending letters to individuals who engaged in virtual currency transactions. In late July, the IRS issued a news release stating that, by the end of August, more than 10,000 taxpayers will receive one of three "educational letters" in order to "help taxpayers understand their tax and filing obligations and how to correct past errors."1 And, just last week, it was reported that the IRS was putting increased pressure on certain taxpayers by sending another round of letters (called CP2000 Notices) to individuals whose reported information did not match information provided by third parties.2

What does all of this mean in terms of IRS enforcement? There are several key takeaways.

A focus on criminal enforcement: While the IRS itself characterized the three versions of its letter as "educational," that is only partly the case.3 One version of the letter (Form 6173) appears to reflect the agency's preliminary belief that taxes are owed – potentially as a result of something other than a misunderstanding. In that letter, the IRS declares that the taxpayer "may not have met your U.S. tax filing and reporting requirements for transactions involving virtual currency."4 Notably, this letter does not contain the same "educational" material included in the other two, but instead extends an invitation to the taxpayer to explain why he or she "followed all tax and information reporting requirements relating to your virtual currency" with an accompanying declaration under penalty of perjury.

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Footnote

1 See https://www.irs.gov/newsroom/irs-has-begun-sending-letters-to-virtual-currency-owners-advising-them-to-pay-back-taxes-file-amendedreturns- part-of-agencys-larger-efforts.

2 See https://www.irs.gov/individuals/understanding-your-cp2000-notice.

3 It is true that one version of the letter explains that the IRS has "information that you have or had one or more accounts containing virtual currency but may not know the requirements for reporting transactions involving virtual currency." See https://www.irs.gov/pub/notices/letter_6174.pdf. The second version goes a little further, explaining that the taxpayer "may not have properly reported [] transactions involving virtual currency." See https://www.irs.gov/pub/notices/letter_6174-a.pdf. In both, the IRS includes educational material, including information regarding the proper reporting of virtual currency transactions.

4 See https://www.irs.gov/pub/notices/letter_6173.pdf.

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