- CP2000 forms have again been sent in error to cryptocurrency traders, saying they owe back taxes and a penalty
- The automated notices are based on the way that crypto exchanges collect user data
- Recipients can usually get the CP2000 rescinded if they reply with proof of their trades
U.S. cryptocurrency traders are once more on the receiving end of erroneous Inland Revenue Service (IRS) letters claiming they owe money over unpaid taxes. The CryptoTrader.tax website has posted on its blog about a cryptocurrency trader who received a CP2000 Notice stating that he had to pay $127,000 for underreporting his 2018 income, when in fact it was the IRS that owed him money. CryptoTrader.tax has reported that “dozens of individuals” have come forward in recent days with concerns over their own CP2000 forms, illustrating once again that the IRS are still not getting to grips with cryptocurrency exchange data.
CryptoTrader.tax Reports “Dozens” of CP2000 Complaints
CryptoTrader.tax featured the story of John (not his real name) and how he is one of many crypto enthusiasts who has received a CP2000 Notice in the past week or so from the IRS claiming that he had underpaid his tax for the tax year ending 2018.
As well as the tax itself, totalling $98,789, John was also hit with penalties and interest totalling $29,171. As CryptoTrader.tax explained however, John actually incurred a loss of $2,000 that year and so was actually owed money off his 2019 tax return.
Error Down to Incorrect Data Collection
The IRS came under fire last year for sending out erroneous CP2000 Notices, which Node40 Balance founder Sean Ryan told us was due to the way that cryptocurrency exchanges used
Form 1099-K forms to report cryptocurrency proceeds to the IRS:
With the 1099-Ks in the cryptocurrency world, the information going to the IRS and to the customer is a very small piece of the picture. What’s being reported is considered income, but when you trade cryptocurrencies you are realizing benefit from increases in price valuation – the 1099-K doesn’t reflect your profit, it reflects your gross amount. So these 1099-Ks are grossly inflated and they’re just not representative of what you owe in taxes. It paints a tiny picture but its incomplete.
The good news is you can usually get the issue resolved by speaking to a tax advisor, providing of course you have filed your taxes correctly in the first place! CryptoTrader.tax advises recipients to work with their tax advisor to draft a letter to the IRS in response to the CP2000 Notice showing your crypto trading profits and losses for that year, ideally with evidence.
This should be enough for the IRS to realize their error and rescind the CP2000 Notice. Until the next year, of course.
