Part 3: A Guide to IRS History with Cryptocurrencies

The United States’ Internal Revenue Service (IRS) has taken a keen interest in cryptocurrency as early as 2013. However, heightened surveillance on people who transact and keep cryptos became apparent only in 2018. It seems that people just can’t keep their crypto stashes away from the eyes of the IRS now. The message is clear here – cryptos need to be reported and taxed today.

In this post, we’ll look at a timeline of IRS history with cryptocurrencies. Let’s see how and when did the IRS start looking into cryptos seriously. We’ll also explain the letters they sent out to crypto holders, and how keen they are to implementing taxation policies on cryptos today.

IRS and Cryptocurrencies – A Timeline

Before we delve into the IRS policies, let’s take a moment to see when and how did IRS start checking cryptocurrencies and formulating rules on taxing them. Cryptos have been around since early 2009, and the IRS formally started looking into the crypto world as early as 2013.

2013 to 2015: IRS Versus Coinbase

Virtual currency exchange giant Coinbase was investigated by the IRS from 2013 to 2015. One year after Coinbase was founded, the IRS served them a “John Doe” summons to gain information on certain accounts on the platform. IRS wanted to look into accounts with at least a $20,000 value in any one transaction type – send, receive, buy, or sell – in any one year. This was the first step IRS did in looking into cryptos.

April 2014: IRS Releases Virtual Currency Guidance

During this time, the IRS released a notice called Virtual Currency Guidance (Notice 2014-21). It served as an FAQ section describing how general tax principles will be applied to transactions that utilize cryptocurrencies (“virtual currency” as IRS previously refers to it). Under the notice, IRS first determined that cryptos shall be treated as property for tax purposes.

March 2018: IRS Reminds Taxpayers on Cryptos and Income Tax

The IRS reminded people that any income taken from crypto transactions shall be reported on their income tax returns. Non-compliance is equivalent to tax evasion and shall be punishable by either 3 years imprisonment or a fine up to $250,000.

July 2018: IRS Announces Virtual Currencies Are Taxable

This is the first time IRS announced that cryptos shall become taxable. They did this through the Withholding & International Individual Compliance Area.

July 2019: IRS Sends Out Educational Letters

Letters dubbed as “educational” were sent out to more than 10,000 taxpayers by the last week of July until the end of August 2019. This is the IRS’ way of advising these taxpayers to comply with current taxing rules governing virtual currencies.

There were three types of IRS letters issued: Letters 6173, 6174, and 6174A. Letter 6173 was given to people whom IRS believed to be engaged in criminal activities involving cryptos. On the other hand, Letters 6174 and 6174A both asked taxpayers how they reported their cryptos. The letters also subtly added ways how the cryptos should properly be reported.

October 2019: IRS Guidance on Hard Forks and Airdrops

Taxing hard forks and airdrops have been uncertain before. But on October 9, 2019, IRS released its Revenue Ruling 2019-24 which clears things up on this issue. Accordingly, hard forks and airdrops are to be reported as gross income and shall be taxed under the highest marginal tax rate.

January 2020: Crypto Question Added to Form 1040

IRS added a new question to 2019’s Form 1040 by January 2020. It asks the taxpayer if he received, sold, sent, exchanged, or acquired any kind of financial interest with cryptos at any time in 2019. The Crypto Question was added as part of more stringent regulations to comply with IRS crypto taxation policies.

March 2020: Dialogues with Crypto Stakeholders

IRS hosted a virtual currency summit last March 3, 2020. It was comprised of invited crypto stakeholders such as crypto companies, exchanges, tax software companies, and crypto advocacy groups. The summit is aimed at discussing a balanced taxpayer service with regulatory enforcement for cryptocurrencies.

IRS Position on Cryptocurrencies

As you can see from the timeline, the IRS has become increasingly vigilant about cryptocurrencies and its holders. The agency made its presence known to taxpayers who they’ve identified to be participating in crypto transactions.

The agency sued Coinbase for the crypto giant to turn over vital information about their account holders. Coinbase lost and provided the information that the IRS needed. From there, IRS has been actively tracing crypto account holders and sending them letters to educate them about the need to report their crypto transactions.

Crypto reporting guidance was only released by IRS in October 2019. That’s pretty much a long time after they’ve actively chased Coinbase’s information regarding their account holders. Now, IRS’ initial guidance was a bit confusing and hence, was met with criticism from the crypto world, the accounting space, and even the Congress. That’s why the IRS released updates on their guidelines from 2018 to 2019.

Let’s move on to the issue of IRS letters being sent to different crypto holders. You might think that those who received IRS letters are all Coinbase customers. Interestingly though, most of them aren’t. This simply means that the IRS has been aggressive enough in finding out details about these customers’ crypto activities. While they may seem aggressive, they’re a bit subtle as well for potential fear of political backlash, most notably from Congress.

Final Thoughts

IRS has been eyeing cryptocurrency holders as early as 2013. They’ve had conflicting views and guidelines on how to report and tax cryptocurrencies on different transaction levels. That’s why they kept on revising them until 2019.

Now, IRS is generally quite aggressive when it comes to having people comply with crypto tax regulations. They seem to be after the people who may be involved in criminal activities using cryptocurrencies. Money laundering and Silk Road types of transactions could be something they’re really focusing on, given their aggression.

Also, the IRS simply wants people to focus on paying the right taxes for gains coming from cryptos. After all, many people have profited from cryptos especially during its kick in 2017. They weren’t able to report since there weren’t clear rules back then. But IRS is here to change all that now.