The Internal Revenue Service has begun sending out new warning letters to crypto holders. Unlike the 10,000 letters that the IRS sent to crypto holders in July, the new notice CP2000 letters specify the amount crypto holders owe. Recipients of the notices can challenge the amount stated by the IRS within 30 days. If they do not respond to the letter within 30 days, they could face sanctions.
A New Round of Letters
The new letters from the tax collector are more detailed and they state how much each person should send to the IRS. The IRS usually sends the CP2000 notice when there is a mismatch between what the taxpayer reported to the revenue service and the information that the agency has obtained through its investigations. In the notice, the IRS states the amount they believe a taxpayer has not paid.
The IRS first sent letters to 10,000 taxpayers in July. These letters were educational and they urged crypto holders to report their earnings and pay their taxes. The CP2000 notices are more severe and they come with major consequences. All recipients of this letter must respond by paying or contesting the request.
In one notice, the IRS obtained data via third parties. It used the data to calculate the proposed tax amount from the Form 1099-K. This form is issued by some crypto exchanges to customers that have traded on their platform and exceeded certain limits. Besides that, crypto exchanges have to file a copy of the document with the IRS.
Serious Doubts about Accuracy
Some crypto taxation experts doubt the accuracy of the IRS using the Form 1099-K to calculate how much tax crypto holders owe. This is because the form usually represents the aggregate crypto volume of a trader and not the actual gains that a crypto trader has made on the transactions.
One crypto researcher voiced his concern about the IRS using this form. James Foust, a senior research fellow at Coin Center said that the 1099-K and 1099-MISC were just informational reports. This form is mentioned in Notice 2014-21 from the IRS. It might be the reason why most exchanges opt to use it in light of a lack of clear instructions from the tax collector. Unlike before, the IRS did not reveal how many of the CP2000 notices it had sent to crypto holders.
It is expected that the IRS will issue new guidelines on crypto taxation soon. This will be an update to guidelines, which they issued in 2014. At when the crypto industry was just taking off. Some issues it will tackle include how to deal with airdrops and hard forks.