Crypto Tax: IRS Notices and Audits
For a no-obligation thirty-minute consultation, please feel free to make an appointment.
Responding to IRS Notices
Have you received a matching notice from IRS suggesting (for example) that you haven’t properly reported all of your capital gains from crypto trades? Don’t panic!
These notices (typically a CP2000) are generated automatically when the IRS can’t match the information it received from Coinbase or another exchange to the sales proceeds and income reported on your tax returns. In most cases, the problem is straightforward: the exchange reported your gross sales proceeds but not your cost basis. The IRS’s computer assumed your basis was zero and concluded that you owe tax on the full amount.
You almost certainly don’t!
But you do need to respond, and you need to respond correctly. The notice has a deadline, and failure to respond generally means that IRS will assess the (almost certainly overstated) full amount. Don’t pay the proposed amount without first establishing your actual cost basis. Why? Because IRS’s number is often going to be much higher than what you really owe.
The Problem: Establishing Cost Basis
Here’s the core issue. When a taxpayer sells stocks, their brokerage will typically report both the sales proceeds and the cost basis to IRS. The IRS can match both numbers against your return and see that everything adds up.
Cryptocurrency has not worked this way….until now. Prior to 2025, there was no DeFi equivalent of Form 1099-B. Taxpayers had to “roll their own” capital gains reports on Form 8949.
Imagine that you transferred 100 ETH with a total cost basis of $200,000 to Coinbase on a date when the fair market value of 100 ETH was only $150,000, and you subsequently used that ETH to purchase BTC. In IRS’s eyes, you just realized a capital loss of $50,000. However, Coinbase understandably has no idea what your basis was!
The proof of your cost basis falls on you. We can help.
Note: Beginning with tax year 2025, exchanges will report crypto sales proceeds on the new Form 1099-DA. This will reduce, but not eliminate, the matching notice problem. In tax year 2026, Form 1099-DA will include cost basis as calculated by each exchange. But if you’ve transferred from custodial wallets or DeFi protocols, the exchange will still lack your complete history.
IRS Audit Examinations
A matching notice is an automated letter. An audit is something different. A Revenue Agent, who is indeed a real live human being, examines your return in detail.
We have had the dubious pleasure of representing more than a few clients in adversarial proceedings with Revenue Agents. Speaking from experience, it is a good strategy to always tell the truth (for one thing, it’s easier to remember). At the same time, one does not need to overshare with IRS.
I try to work collaboratively with IRS agents on these difficult, unsettled issues while representing my client’s interests vigorously. Crypto tax law is emergent law. A good-faith taxpayer and a good-faith auditor may not always see eye-to-eye on the proper interpretation. And that’s OK: the system has procedures for resolving disagreements.
When to Hire Us? When to Hire a Tax Attorney? (“¿Por qué no los dos?”)
If one’s potential liability is less than $500,000 and the issues are relatively straightforward, then you may wish to consider engaging us directly. We know how crypto audits work because we’ve handled them, repeatedly.
If there are inadvertent omissions in your previous filings, we may amend them, working collaboratively with the Revenue Agent. When the amount in dispute is potentially large enough that litigation is a realistic possibility, you may be wise to choose a tax attorney instead of us at the outset. If you’re right and IRS is mistaken, we advocate your position before the IRS. If the Revenue Agent does not agree, we may appeal the decision on your behalf. While past performance does not guarantee future results, we have successfully resolved cryptocurrency matters at Appeals.
We are not tax attorneys: if your potential liability exceeds $1,000,000, or if you foresee the case winding up in Tax Court, then please hire a tax attorney. However, not every tax attorney deals with cryptocurrency clients on an everyday basis. Your tax attorney can hire us to assist on the audit. Again, while past performance does not guarantee future results, we assisted one tax attorney in an audit involving four years of cryptocurrency transactions, and that matter resulted in a very favorable result for their client.
Behind on Filing Your Returns? That’s a Different Page
If your situation isn’t an IRS notice or audit, but rather a recognition that your past filings are incomplete or missing altogether, see our Coming into Compliance page. The approach is different, and the earlier you act, the better.
For a no-obligation thirty-minute consultation, please feel free to make an appointment.