US Crypto Holders Only Have a Few Days to Reply to the IRS 6173 Letter
Last month, the United States Internal Revenue Service (IRS) sent approximately 10,000 letters to cryptocurrency holders regarding their crypto holdings. The IRS has begun sending letters to taxpayers with digital currency transactions that potentially failed to report income and pay the resulting tax from digital currency transactions or did not report their transactions properly.
Those who already received letter 6173, titled “Reporting Virtual Currency Transactions” on July 16 now have less than a week to reply to the IRS. The most serious of the trio of letters that were disseminated (sent alongside letters 6174 and 6174-A), 6173 requires immediate action.
Full activity report. The IRS requires tax compliance and reporting for cryptocurrency traders and investors across all their accounts. The report must include all activities — wallets, blockchain and exchange information — for the relevant years. You can use a system that assists you to get a full report of all your transactions since day one. Today, some systems, based on blockchain, use distributed ledger technology to trace your entire history of currency activity from day one and provides alerts on incomplete information for retrieval, plus addresses that may have been forgotten. In what is essentially a turnkey tax solution for crypto, it can run the full gamut of related activities — including wallets, exchanges, initial coin offerings, etc. — and even goes so far as to issue one comprehensive report on the relevant years of activity for each year separately.
Correct old mistakes. Many had previously only reported when they had bought into or out of fiat. This is indeed relevant, as are transactions of crypto to purchase goods, other crypto assets and even stablecoins like Tether (USDT).
Make sure your calculation is right. While the specific identification method identifies the exact that you sold and calculates your tax liability on the sale of the actual Bitcoin based on the blockchain evidence, the first-in-first-out (FIFO) method does not take real-time user activity into consideration. To calculate in FIFO method, make a list of all purchases and a list of all sales. Then, match them. Take the first one in the purchase list and calculate the tax results as if you sold it at the price on the date from the first sale on the sales list. This can sometimes result in over taxation, especially if you bought your first Bitcoin (BTC) in the early years. In order to calculate using the specific identification method, you need to identify (by using evidence from the blockchain) the purchase dates and sales date of all Bitcoin that came in and out of your wallet for the same tax year. Then, you match the purchase and sale dates and prices of the same Bitcoin using blockchain data and finally, calculate the tax liability. If you don’t know how to do this, you can use a calculation platform.
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