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.