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For the second year in a row, the Internal Revenue Service (IRS) is warning cryptocurrency investors that they have underestimated their holdings. But it could be another false alarm.
According to a blog post published Monday by tax software provider CryptoTrader.tax, “dozens of people” recently received notifications of having to tax on earnings from crypto holdings that they did not report at the time of submission in 2018.
Shehan Chandrasekera, Head of CoinTracker’s Tax Strategy, said she heard about crypto investors receiving these letters this year.
The CP2000 form letters indicate how much the IRS believes users should and provide due dates for payment. However, users probably never realized these gains and don’t actually owe these funds, CryptoTrader.tax said.
Similar letters were sent to users of the cryptocurrency exchange last year. At the time, Justin Woodward, the co-founder of TaxBit, another software provider, told CoinDesk that people were receiving letters because their exchange reported transactions to the IRS using the 1099-K form. This IRS form shows that all transactions generate revenue, even if some transactions have actually resulted in a loss for the user.
As a result, an exchange could signal a significantly inflated tax burden for the user. The letters sent in 2019 concerned the 2017 fiscal year.
The same problem appears to occur this year, according to the CryptoTrader blog post.
“These CP2000 cryptocurrency-related fiscal mishaps all stem from Coinbase and other exchanges using the 1099K form to report cryptocurrency proceeds to the IRS. This is a problem,” the blog post states.
According to a photo on the CryptoTrader blog post, at least one Coinbase user is definitely interested. It is unclear whether users from other exchanges are also receiving these letters.
Users who receive any of these forms should calculate their actual gains and losses and report them to the IRS, the post states.
Exchanges could prevent this problem by submitting 1099-B reports to the IRS, which accurately track gains and losses, rather than merchant-centric 1099-K forms, TaxBit co-founder Austin Woodward told CoinDesk in March.
At the time, he said “there was never a clear IRS guideline for that [the 1099-K] it was the correct form. “
Spokesmen for the IRS and Coinbase did not immediately respond to requests for comment.
