Lately, the Internal Revenue Service has ramped up the frequency of warning letters sent to cryptocurrency investors. Reports indicate that most recipients receive one of three letter types: 6173, 6174, or CP2000. But what do these letters mean, and do they signal a broader crackdown on crypto?
Regulation of cryptocurrency taxes is still something many people don’t pay attention to; however, ignoring this part of financial life may be dangerous. The most vivid example is the use of alleged tax evasion for the prosecution of Roger Ver, one of the first notable Bitcoin popularizers.
The surge in IRS letter frequency may be explained by the 1099-DA regulations scheduled to be adopted this year. It is the first cryptocurrency-specific tax form by the IRS.
Some investors find the warning letters approach dismaying and feel it is harassment, as in these letters, the IRS informs receivers that the service is aware they performed cryptocurrency transactions, and these transactions must be reported to the IRS properly.
What makes some of these letters look creepy is that the IRS is throwing facts like “we know you owned crypto between 2018 and 2020” at the receiver and alleging that the letter receiver may not have reported crypto-related income properly. Let’s check what these letters mean practically.
Types of the letters
Mainly, crypto investors receive three types of letters from the IRS: 6173, 6174, and CP2000. Form 6174 is regarded as the least disturbing, as it has solely an informational purpose and doesn’t require action. It is a “soft notice” letter and, basically, it can be ignored.
Still, it signals that the IRS is aware of your involvement in crypto investment. If the IRS believes the taxpayer has done something wrong, it may send more urgent letters later. Letter 6174 may be seen as a good reason to check if previous reports were made correctly.
6174 doesn’t indicate that the IRS is aware of any wrongdoing. Taxpayers may receive this letter if they were using U.S.-based exchanges, such as Kraken, Coinbase, Binance US, and others. Another possible reason is that their crypto transactions were reported by someone using Form 1099-MISC or 1099-B. Finally, the receiver’s account could have been flagged by the IRS because of a third-party data match.
The 6173 and CP2000 letters are more urgent and require action. Letter 6173 is the letter that wasn’t frequent until now. It states:
“We have information that you have or had one or more accounts containing virtual currency and may not have met your U.S. tax filing and reporting requirements for transactions involving virtual currency, which include cryptocurrency and non-crypto virtual currencies.”
This letter cannot be ignored as it unambiguously informs a taxpayer that they have allegedly underreported their crypto income, and the IRS can do an audit. The info about the taxpayers’ crypto transactions may be obtained by the IRS from the exchanges they use.
Discrepancies between reported crypto transactions and exchange data may lead to a 6173 letter. On top of a complete lack of reports on crypto, the reason may be errors in reporting—such as not reporting staking or mining rewards, not applying capital gains tax on crypto conversions, and more. A tax attorney can help fix the problems before the deadline indicated in the letter.
The CP2000 notice includes the specific amount that needed to be reported. The source of this letter is the Automated Underreporter Unit of the IRS, which generates due notices using computers. Given that these notices are generated automatically, there’s a chance they’re incorrect.
In some cases, CP2000 claims the taxpayer owes more in taxes than they actually do. Some forms may inform the taxpayer of a refund. If the amount is correct, the taxpayer may fill in the form and pay. If not, it’s better to dispute it. Calling a tax attorney may be an option.
Given how much info the IRS may gather, a proactive position of crypto investors and traders is a must. It’s better to work on tax reports diligently and be ready to respond to IRS letters in time. Usually, this means within a 30-day period.
The IRS vs. Trump Administration 2.0
The IRS will have more information about cryptocurrency transactions than before. That will happen this year as soon as Form 1099-DA is adopted. The pressure is rising, even as the crypto-friendly Trump Administration 2.0 is planning the abolition of the IRS itself and replacing it with tariffs. In January 2025, Congressman Earl Carter proposed a bill replacing the IRS with a consumption tax—meaning that prices would rise substantially.
Commerce Secretary Howard Lutnick explained that the plans to abolish the IRS are in line with the protectionist policies of Donald Trump. The replacement of the IRS with tariffs is summed up with the credo: “make the outsiders pay.”
It’s unclear whether Trump will actually abolish the IRS anytime soon, but the increased scrutiny of crypto transactions may only fuel supporters’ desire to shut the service down.
