IRS Letter 6174: What It Means and What to Do If You Receive One
Receiving a letter from the IRS about your cryptocurrency transactions can be alarming, especially if you aren't sure what triggered it or whether you made a mistake on your taxes.
If you've received IRS Letter 6174, the good news is that it does not automatically mean you're being audited or that you owe additional taxes. However, it is a reminder from the IRS to make sure you've properly reported your cryptocurrency transactions.
In this guide, we'll explain what IRS Letter 6174 means, why you might have received it, whether you need to respond, and what steps you should take to make sure your crypto taxes are accurate.
Key takeaways:
IRS Letter 6174 is an educational notice, not an audit or a tax bill.
You do not need to respond directly to Letter 6174.
Receiving the letter does not necessarily mean you made a mistake on your taxes.
If you've failed to report cryptocurrency transactions, you may need to file an amended tax return.
Crypto tax software like Awaken can help you review your transaction history and generate accurate tax reports.
What Is IRS Letter 6174?
IRS Letter 6174 is an official notice sent by the Internal Revenue Service to taxpayers who have owned or transacted with cryptocurrency. Its purpose is to educate recipients about their cryptocurrency tax reporting obligations and encourage them to correct any previous reporting mistakes.
The IRS began sending these letters in July 2019 as part of a broader cryptocurrency tax compliance campaign.
The letter explains that the IRS has information indicating that you have or previously had one or more accounts containing virtual currency, but you might not understand the associated tax reporting requirements.
It also explains that cryptocurrency is generally treated as property for federal income tax purposes, meaning certain transactions can result in taxable income or capital gains.
Importantly, Letter 6174 does not state that the IRS has determined you violated any tax laws.
You can view an official sample IRS Letter 6174 on the IRS website.
Why Did I Receive IRS Letter 6174?
You may have received IRS Letter 6174 because the IRS has information connecting you to cryptocurrency ownership or activity.
The IRS receives information about cryptocurrency transactions through various sources, including cryptocurrency exchanges, tax reporting forms, and information obtained through compliance investigations.
For example, exchanges may report certain customer transactions to the IRS using Form 1099 or other reporting mechanisms. The IRS has also obtained cryptocurrency customer information through legal requests and investigations.
Receiving this letter does not necessarily mean the IRS has identified a specific transaction that you failed to report.
Some common situations that warrant reviewing your crypto taxes include:
Buying and selling cryptocurrencies such as Bitcoin or Ethereum.
Trading one cryptocurrency for another.
Receiving cryptocurrency through staking, mining, or other rewards.
Using cryptocurrency to purchase goods or services.
Trading across multiple exchanges or decentralized finance (DeFi) platforms.
Failing to report cryptocurrency capital gains or income in previous years.
Even if you believe you've reported everything correctly, it's worth reviewing your records to confirm that no taxable transactions were overlooked.
Can Crypto Tax Software Errors Lead to an IRS Letter?
One potential source of IRS reporting discrepancies is how your cryptocurrency tax software handles transactions reported on Form 1099-DA, the tax form used by brokers to report certain digital asset sales to the IRS.
When you sell cryptocurrency on a centralized exchange like Coinbase or Kraken, the exchange may report those transactions directly to the IRS. Your tax software needs to correctly identify which transactions were already reported and categorize them appropriately on Form 8949.
For digital asset transactions where the broker reported proceeds but not cost basis to the IRS, the correct Form 8949 categories are generally:
Box H: Short-term transactions reported on Form 1099-DA without basis reported to the IRS.
Box K: Long-term transactions reported on Form 1099-DA without basis reported to the IRS.
However, if your tax software incorrectly identifies those transactions as not reported to the IRS, it may place them in:
Box I: Short-term digital asset transactions not reported on Form 1099-DA or another applicable broker statement.
Box L: Long-term digital asset transactions not reported on Form 1099-DA or another applicable broker statement.
This creates a potential discrepancy between the transactions reported by your exchange and how those transactions appear on your tax return, even if the capital gains and losses themselves were calculated correctly.
Such discrepancies can complicate the IRS's ability to reconcile your return against the information it receives from exchanges.
What Should You Do?
If you've received an IRS crypto tax letter, check your exchange-issued Form 1099-DA against your Form 8949. Confirm that transactions reported to the IRS by your exchange were placed in the appropriate categories.
If you discover that your tax software incorrectly classified transactions, you may need to correct your tax reports and consult a tax professional about whether an amended return is necessary.
Awaken Tax can help you review your cryptocurrency transactions and prepare accurate tax reports that account for exchange-reported activity.
What to Do If You Receive Letter 6174 From the IRS
If you've received an IRS Letter 6174, you do not need to panic or immediately send a response. However, you should take the opportunity to verify that your cryptocurrency taxes were accurately reported.
Here's what we recommend.
Step 1: Read the Letter and Verify That It's Legitimate
Start by carefully reading the letter and confirming that it is genuinely from the IRS.
An authentic Letter 6174 should identify the IRS, reference cryptocurrency or virtual currency transactions, and provide information about your reporting obligations.
You can compare the letter you received against the official sample published on IRS.gov.
Be cautious of suspicious correspondence demanding immediate cryptocurrency payments, directing you to unfamiliar websites, or asking you to share wallet credentials or private keys.
Step 2: Review Your Cryptocurrency Transaction History
The next step is to make sure you've accounted for your cryptocurrency transactions across all wallets, exchanges, and blockchains.
This is especially important if you've used multiple platforms over several years.
Review your history for transactions such as:
Cryptocurrency sales for US dollars or other fiat currencies.
Crypto-to-crypto trades, including swaps on decentralized exchanges.
Staking, mining, airdrop, and other taxable cryptocurrency income.
Purchases made using cryptocurrency.
DeFi transactions that may have resulted in taxable disposals or income.
Also review transfers between wallets you own. These transfers generally aren't taxable by themselves, but they need to be accounted for correctly to avoid inaccurate gains or missing cost basis.
If you have hundreds or thousands of transactions, manually reconstructing this information can be difficult. Using cryptocurrency tax software can make the process significantly easier.
Step 3: Check Your Previous Crypto Tax Reports
Once you've organized your transaction history, compare your actual cryptocurrency activity against what you reported on your previous tax returns.
Depending on your transactions, cryptocurrency reporting may involve:
Form 8949: Reporting sales and other dispositions of capital assets.
Schedule D: Summarizing capital gains and losses.
Schedule 1: Reporting certain types of cryptocurrency income, where applicable.
Schedule C: Reporting cryptocurrency received through self-employment or business activities.
Check for missing transactions, incorrect cost basis, inaccurate proceeds, and unreported cryptocurrency income.
You should also verify that you've properly accounted for cryptocurrency losses. In some cases, missing transaction data can make your reported capital gains appear higher than they actually were.
Step 4: Correct Any Errors You Discover
If your review reveals that you incorrectly reported your cryptocurrency taxes, you may need to file an amended tax return.
For individual taxpayers, this generally involves filing Form 1040-X to correct previously filed returns, along with any necessary updated schedules or forms.
The original IRS Letter 6174 specifically instructs taxpayers who need to submit amended or delinquent returns to write "Letter 6174" at the top of the first page and follow the mailing instructions provided.
If you discover significant unreported income, multiple years of missing returns, or potential penalties, consider consulting a cryptocurrency tax professional before proceeding.
If your original returns were accurate, you generally don't need to amend them simply because you received Letter 6174.
Step 5: Keep Your Records Organized
Even if you determine that your cryptocurrency taxes were filed correctly, it's important to retain records supporting your calculations.
These may include exchange transaction histories, wallet addresses, acquisition costs, sales proceeds, income records, and copies of your submitted tax forms.
Maintaining clear records can help if the IRS requests additional information in the future.
Do I Need to Respond to IRS Letter 6174?
No. IRS Letter 6174 does not require a direct response.
The IRS explicitly states in the letter:
"You do not need to respond to this letter."
However, that doesn't mean you should ignore the information it contains.
If you've incorrectly reported your cryptocurrency activity, the IRS expects you to take the appropriate steps to correct your returns.
The distinction is important: you aren't required to send a reply acknowledging the letter, but you are still responsible for meeting your tax reporting obligations.
Does IRS Letter 6174 Mean I'm Being Audited?
No. Receiving IRS Letter 6174 does not mean you're being audited.
Letter 6174 is considered an educational or voluntary compliance notice, sometimes referred to as an IRS soft notice.
It informs you about your reporting obligations without initiating a formal tax examination.
The IRS explicitly distinguishes these voluntary compliance letters from audits.
However, receiving Letter 6174 does not guarantee that you won't be audited in the future. The IRS can still examine cryptocurrency tax returns and pursue enforcement when appropriate.
The best response is to ensure your reporting is accurate and keep supporting records available.
IRS Letter 6174 vs. Letter 6174-A: What's the Difference?
The IRS issues several types of cryptocurrency compliance letters, including Letter 6174, Letter 6174-A, and Letter 6173.
Although they address similar tax reporting concerns, they have important differences.
IRS Letter | Purpose | Response Required? |
|---|---|---|
Letter 6174 | Educational reminder about cryptocurrency tax reporting requirements | No |
Letter 6174-A | Educational notice indicating possible reporting issues and warning of potential future enforcement correspondence | No |
Letter 6173 | More direct compliance inquiry requiring the taxpayer to address possible reporting failures | Yes, follow the letter's deadline and instructions |
What Is IRS Letter 6174-A?
IRS Letter 6174-A is similar to Letter 6174, but its language is somewhat stronger.
While Letter 6174 generally tells taxpayers that they may not understand their cryptocurrency reporting obligations, Letter 6174-A indicates that the IRS has information suggesting they may not have properly reported their cryptocurrency transactions.
Letter 6174-A also explicitly warns that the IRS may send additional correspondence about potential enforcement activity in the future.
Despite these differences, Letter 6174-A does not automatically mean you're being audited, and it does not require a direct response.
If you receive Letter 6174-A, you should carefully review your cryptocurrency tax history and correct any inaccurate or missing returns.
You can review the official IRS Letter 6174-A for more information.
How Can Awaken Help If You Receive an IRS Crypto Letter?
If you've received IRS Letter 6174 and aren't sure whether your cryptocurrency taxes were accurately reported, Awaken Tax can help you reconstruct and review your transaction history.
Awaken is cryptocurrency tax software designed to simplify tax reporting across exchanges, wallets, and blockchains.
Instead of manually calculating gains and losses from individual transactions, you can use Awaken to consolidate your trading activity and generate reports.
With Awaken, you can:
Import your crypto transactions: Connect supported wallets, exchanges, and blockchains to bring your transaction history together.
Review transaction classifications: Identify sales, swaps, transfers, income, and other activity to ensure transactions are treated appropriately.
Calculate capital gains and losses: Generate tax calculations using your transaction history and cost basis.
Identify missing information: Review transactions that need additional information or corrections.
Generate crypto tax reports: Download reports, including Form 8949 data, that can be used to prepare your tax returns.
If you discover that previous tax reports were inaccurate, Awaken can help you prepare updated cryptocurrency tax calculations to share with your tax preparer or use when preparing amended returns.
Received an IRS crypto tax letter? Get started with Awaken Tax to review your cryptocurrency transactions and make sure your reporting is accurate.
Frequently Asked Questions About IRS Letter 6174
Is IRS Letter 6174 serious?
IRS Letter 6174 is an educational notice, not an immediate penalty or audit. However, it should still be taken seriously because it reminds you of your legal obligation to report taxable cryptocurrency transactions. If you've made mistakes on your previous returns, you should address them.
Does IRS Letter 6174 mean I owe taxes?
Not necessarily. The letter does not establish that you owe additional taxes. If you've already reported your cryptocurrency activity correctly, you may not need to take any further action. If you discover unreported gains or income, additional taxes, interest, or penalties could apply.
What happens if I ignore IRS Letter 6174?
You aren't required to respond directly to IRS Letter 6174. If your returns are accurate, you generally don't need to take further action. However, failing to correct known reporting errors could result in tax liabilities, penalties, interest, or future IRS enforcement activity.
Why did the IRS send me a cryptocurrency letter?
The IRS may have information showing that you have owned or transacted with cryptocurrency. Receiving the letter does not necessarily mean the IRS has identified specific unreported income. The notice is intended to encourage taxpayers to review their cryptocurrency tax reporting.
Do I need to amend my tax return after receiving Letter 6174?
Only if your review identifies errors or omissions that require correction. Receiving Letter 6174 alone does not mean you need to file an amended return. If you omitted taxable cryptocurrency transactions, consult a tax professional about filing Form 1040-X and any necessary supporting schedules.
Can the IRS track my cryptocurrency transactions?
Yes. The IRS can obtain information through cryptocurrency exchange reporting, legal requests, blockchain analysis, and other investigative methods. Although cryptocurrency wallets may not directly display a person's identity, blockchain transactions are often publicly visible and can sometimes be associated with identifiable individuals.
What if I only bought cryptocurrency and never sold it?
Simply purchasing cryptocurrency with US dollars and holding it generally does not create a taxable gain or loss. If you haven't sold, exchanged, or otherwise disposed of your cryptocurrency and haven't received taxable crypto income, you may have no cryptocurrency-related tax liability from those holdings.
What if I received Letter 6174-A instead?
Letter 6174-A is similar to Letter 6174 but contains stronger language concerning potential reporting errors and future IRS enforcement correspondence. You aren't required to respond directly, but you should review your cryptocurrency tax history and correct any errors you discover.
Final Thoughts: Don't Panic If You Receive IRS Letter 6174
Receiving an IRS cryptocurrency letter can be stressful, but Letter 6174 is primarily an educational notice intended to encourage accurate tax reporting.
It does not automatically mean you're being audited, and it does not require an immediate response.
The most important step is to make sure your cryptocurrency transactions were reported correctly. If you discover missing transactions, inaccurate gains, or unreported income, you can take steps to correct your previous returns.
With Awaken Tax, you can organize your crypto transaction history, calculate capital gains and losses, and generate the tax reports needed to review your filings.
Taking the time to verify your reporting today can help you avoid more complicated tax issues in the future.
Disclaimer: This article is for informational purposes only and does not constitute tax or legal advice. Awaken Tax provides cryptocurrency tax reporting software, not legal representation or individualized tax advice. Consult a qualified tax professional regarding your specific circumstances.
