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Got a letter from the IRS about your cryptocurrency investments?

The IRS taxes cryptocurrency as capital gains, but it requires taxpayers to disclose every transaction, whether or not it resulted in gains or losses. If you have invested in Bitcoin or another digital currency and haven't disclosed it to the IRS, you may not have paid all the taxes due.

At the end of last month, the IRS began sending letters to some 10,000 taxpayers that it suspects may owe taxes on crypto gains. The letters came in two flavors.

The first was probably aimed at people with relatively reasonable excuses for their delinquency. For example, a Bloomberg source suspects that the letter was sent, for example, to the parents of minors who invest in cryptocurrency without properly accounting for it. This letter simply notifies the recipient that they may owe tax on cryptocurrency and urges them to file an amended tax return (or make a delinquent filing).

The second type of letter was a bit more worrisome. It demands that the taxpayer submit, in writing and under penalty of perjury, all relevant information about cryptocurrency transactions that took place between 2013 and 2017. The fact that the submission must be under oath gives the IRS leverage if they discover you weren't completely honest. You could be charged with perjury in addition to any tax offenses.

The agency also makes clear that it will cross-check your response against other sources of information, such as banks, financial advisors and cryptocurrency exchanges. In 2017, the IRS won the right to force the exchange Coinbase to provide it with information on all transactions of at least $20,000 during the period from 2013 to 2015, and there is no reason to believe it won't use the same tactic with other exchanges.

Should you file an amended return in response to the letter?

Depending on your exact circumstances, you may owe taxes on your crypto gains. However, filing an amended return could be considered an admission that you filed inaccurately in the first place. The IRS is probably seeking to gain voluntary compliance rather than to punish noncompliance, but it's a good idea to review your situation with a tax attorney before you take any other steps.

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