Some cryptocurrency investors have started to receive notices from the Internal Revenue Service because what they reported on their tax returns doesn’t match information the agency is getting from third parties, such as exchanges.
The mismatch notices—called CP2000 notices—inform taxpayers that discrepancies have been detected and ask them to justify the positions they took on their returns. For cryptocurrency investors, the mismatches often occur because a handful of virtual currency exchanges are providing information to the IRS that paints an inaccurate picture of what investors really owe in taxes, according to practitioners. This is due to a variety of factors, including that only gross amounts paid to customers are reported on the information returns, or Forms 1099-K. And it means that IRS efforts to enforce cryptocurrency compliance may instead be sowing confusion for taxpayers who are playing by the rules.
Form 1099-K and the IRS
The Form 1099-K is used by third party processors to report certain payment transactions to the IRS and to recipients of those payments in an effort to improve voluntary tax compliance. An individual should only receive a 1099-K if he or she had more than 200 transactions and received gross payments of more than $20,000 over the course of a year.
CP2000 notices aren’t a new type of form or unique to cryptocurrencies, but many individuals with digital assets have been receiving them lately because of the 1099-K issues. The notices coincide with a separate batch of letters the IRS started sending to more than 10,000 cryptocurrency users in July warning of potential civil and criminal enforcement action if they don’t report their digital assets. These efforts demonstrate the IRS’s increased focus on ensuring cryptocurrency investors are paying their fair share in taxes.