In early August, the IRS began issuing Notice CP2000 to advise taxpayers owning virtual currency that the income or payment information the IRS received from independent third-party sources does not match the virtual currency income information reported on taxpayers’ federal income tax returns. Adjusting for the discrepancies may cause an increase in tax, a decrease in tax, or may not change the tax owed at all depending on an individual taxpayer’s facts and circumstances.
The Notice follows education letters issued in July intended to put taxpayers on alert that the IRS is aware of their virtual currency transactions and to educate them on how to properly report those transactions.
>> Read “IRS Issues 3 Types of Education Letters on Virtual Currency Underreporting.”
The Notice is not a formal audit notification, rather, it is a notice of proposed tax changes that allows the taxpayer to agree or disagree within 30 days from the date printed on the letter. If a taxpayer fails to respond within the 30-day window, the IRS will send a follow up letter that is considered a formal adjustment or “Statutory Notice of Deficiency.”
Taxpayers may be receiving the Notice due to the Form 1099-K issued by some virtual currency exchanges for account holders that conducted transactions above a certain threshold.
For example, Coinbase Pro, Prime and Merchant issue Forms 1099-K if the account holder has at least 200 transactions that equal or exceed $20,000. The Form 1099-K does not report net gain from virtual currency transactions, but, rather, reports the gross amount of all virtual currency transactions in a calendar year. As such, the amount reported on Form 1099-K may include non-taxable transactions, such as transferring virtual currency out of an exchange account into a virtual currency wallet as well as not factoring in a taxpayer’s basis in amounts reported for certain sales or exchanges.
The IRS acknowledges the independent third-party source may have made errors in reporting and that reporting limitations currently exist. Accordingly, the agency requests supporting documentation from the taxpayer to substantiate any modifications to the proposed discrepancy.
Notice CP2000 is yet another reminder of the importance of record keeping for all virtual currency transactions, as obtaining such information months or years later may be challenging. Taxpayers that receive the Notice should reach out to their tax advisors to discuss how to respond.
Please contact a member of your service team, or contact Cynthia Pedersen at cpedersen@cohenpca.com or Peter Gilroy-Scott at peter.gilroy-scott@cohencpa.com for further discussion.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.