TL;DR
- The IRS sent warning letters to approximately 10,000 cryptocurrency holders starting in late July 2019
- Three letter types — 6173, 6174, and 6174-A — each carrying different compliance obligations
- The agency is using data analytics to identify traders who failed to report crypto income
- Cryptocurrency is treated as property for US tax purposes, meaning every transaction can trigger capital gains
- Non-compliance could result in audits, severe penalties, or even criminal prosecution
The Internal Revenue Service launched one of its most aggressive campaigns against cryptocurrency tax evasion during the summer of 2019, sending warning letters to roughly 10,000 taxpayers identified as virtual currency holders. The move, which began in late July and continued through August, sent shockwaves through the crypto community and underscored a stark reality: the days of flying under the tax radar were over.
Understanding the IRS Letter Campaign
The IRS deployed three distinct letter types in this outreach effort. Letter 6173 required recipients to sign a statement under penalty of perjury confirming they had reported all crypto-related income. Letters 6174 and 6174-A were advisory in nature, informing holders of their tax obligations but not demanding an immediate response. Regardless of the letter type, the underlying message was unambiguous — the IRS was watching.
The agency made this explicit in an official statement, warning taxpayers to “take these letters very seriously.” Ignoring tax obligations, the IRS cautioned, could trigger audits or even criminal investigations if illegal activity was suspected to have influenced the transactions.
Data Analytics and the Crypto Trail
A key element of this crackdown was the IRS’s use of “data analytics” to track down crypto traders who had underreported or failed to report their virtual currency transactions. With blockchain transactions permanently recorded on public ledgers, the IRS found itself in a uniquely advantageous position — one where the very technology designed to provide financial privacy paradoxically left an indelible paper trail.
This technological advantage proved significant. According to data from Credit Karma, a free online tax preparation service, fewer than 100 of the 250,000 tax returns filed through its platform in January 2018 reported owning cryptocurrency. This represented a tiny fraction of the estimated 7% of Americans believed to hold digital assets at the time. Of those who did report, only one disclosed a gain or loss, despite Bitcoin’s dramatic price swings throughout 2017, when it surged from under $1,000 to nearly $20,000.
The Property Classification Problem
At the heart of the compliance challenge was the IRS’s treatment of cryptocurrency as property rather than currency, as established in Notice 2014-21. This classification meant that every crypto transaction — whether buying a cup of coffee with Bitcoin or trading Ethereum for Litecoin — could trigger a taxable capital gains event. For active traders, the record-keeping burden was enormous.
The practical implications were significant. A person using Bitcoin to purchase goods or services was treated as if they had sold property and used the cash proceeds for the transaction. This framework made everyday use of cryptocurrency impractical from a tax compliance perspective, as users needed to track gains and losses on every single transaction.
What This Meant for the Market
As the letters landed in mailboxes across the United States, Bitcoin was trading at approximately $11,966 on August 8, 2019, according to CoinMarketCap data. Ethereum sat at $220.94, with the total cryptocurrency market cap hovering above $300 billion. The regulatory pressure added a layer of uncertainty to a market already navigating the complexities of a maturing asset class.
The IRS’s Virtual Currency Compliance Campaign represented a coordinated effort to address what the agency viewed as widespread noncompliance. Through multiple treatment streams including outreach and examinations, the campaign aimed to bring crypto holders into the tax system — voluntarily or otherwise.
The Road Ahead
Perhaps most notably, the IRS signaled that new guidance on cryptocurrency taxation would be issued “in the near future.” This was a significant development, as Notice 2014-21 had been the agency’s primary guidance on the topic for over five years, leaving many questions unanswered in a rapidly evolving landscape.
The IRS also expressed particular concern about cryptocurrency’s popularity among individuals involved in illegal transactions, warning that the use of digital assets could promote intentional tax evasion — a felony carrying serious monetary penalties and potential imprisonment.
Why This Matters
The August 2019 IRS letter campaign marked a turning point in the relationship between cryptocurrency and US tax authorities. It demonstrated that the federal government was not only aware of widespread underreporting but had developed the technological capability to identify individual non-compliant taxpayers at scale. For the broader crypto market, the crackdown signaled that mainstream adoption would inevitably bring mainstream regulation — and that the industry needed to develop better compliance infrastructure to support everyday users navigating complex tax obligations. The campaign also foreshadowed the more detailed reporting requirements that would emerge in subsequent years, as regulators worldwide moved to bring digital assets into the established financial regulatory framework.
Disclaimer: This article is for informational purposes only and does not constitute financial, tax, or legal advice. Always consult with a qualified professional regarding your specific tax obligations.
irs sending 10k letters using data analytics on crypto trades, property tax rules hitting hard
getting a 6173 letter and having to sign under penalty of perjury sounds terrifying. wonder how many people just panicked and overpaid
my buddy got one of these. said he spent more on the accountant than the actual tax bill lol
mkowalski_99 the data analytics part is what scared people. IRS got records from Coinbase via subpoena in 2018 and cross referenced against filed returns. thats how they built the list
coinbase subpoena was the blueprint. after that every major exchange got similar requests. the IRS built their crypto enforcement division on exchange data
Good point about getting a 6173 lette… I hadn’t thought about it that way. The real issue is still adoption though.
got the 6174-a version myself, they really went after the bigger holders first
6174_recipient curious did you end up filing amended returns or just pay what they asked. heard the IRS was actually reasonable if you came forward voluntarily
three different letter types is actually pretty smart. the 6174 basically says you might want to check your math while 6173 is we know what you did
three letter tiers was smart enforcement. scare the compliant ones into overpaying and actually investigate the real evasion. very efficient use of resources
three tiers was smart but letter 6173 was basically extortion with extra steps. sign under perjury or we audit you. no due process just compliance theater
dc_tax_nerd letter 6173 requiring a signed statement under penalty of perjury was aggressive. IRS basically said prove you complied or we assume you didnt
10,000 letters in 2019 and most of those people probably had no idea they owed taxes on every crypto to crypto trade. the education gap was enormous
education gap in 2019 was one thing but its 2026 and people still buy crypto on CashApp without knowing swap triggers a taxable event
Fatou D. the education gap is still huge in 2026. people buy BTC on cashapp and have no idea every swap is a taxable event. IRS should have led with education instead of threats
mkowalski_99 buddy spent more on accountant than the tax bill. thats the real IRS strategy, make compliance so expensive people just overpay
crypto to crypto trades being taxable events caught so many people off guard. trade ETH for LINK and suddenly you owe capital gains on the ETH even though you never touched fiat
crypto to crypto being a taxable event is the one that destroys people. swap BTC for a stablecoin and suddenly you owe short term gains
cpa_crypto_ every swap a taxable event and the IRS still doesnt have a real crypto tax form. 8949 was designed for stocks. the system is broken
Anneli S. form 8949 was designed in 2011 for stock trades. the IRS still hasnt built a crypto specific form in 2026 because they dont want to, it keeps compliance costs punitive
Marcus W the crypto to crypto taxable event rule is brutal. swap BTC for USDC to lock in gains and suddenly you owe short term capital gains even though you never cashed to fiat
Marcus W. the crypto to crypto rule is what killed me in 2019. swapped ETH for LINK, didnt sell to fiat, still owed taxes. absolute madness
Marcus W. crypto to crypto being taxable is what created the entire tax software industry. CoinTracker, Koinly, ZenLedger all exist because the IRS refused to issue clear guidance
The approach outlined here makes more sense than what most projects are trying to do.
The author clearly knows their stuff. Most of these points get missed in mainstream coverage.