Watch out crypto traders, the IRS is coming for you
The IRS mailed more than 10,000 of these letters in 2019 and never really stopped. The tax it proposes is usually too high, for a reason you can correct.
In 2019 the IRS mailed more than 10,000 letters to people it believed held cryptocurrency. That campaign never really stopped. The agency still sends these notices, and it now receives far more data from exchanges than it did then. When one arrives, it usually means the IRS has a record tying you to crypto and wants to know why your return does not match it.
Most of the time the number on the notice is wrong, and it is wrong in a predictable way. Once you see why, the response gets much simpler.
How the IRS treats crypto
The IRS treats cryptocurrency as property, the same category as stocks, not as currency. You owe tax when you dispose of it, and you owe it on the gain, meaning the sale price minus what you paid. Buying crypto and holding it is not a taxable event. Selling it, swapping one coin for another, or spending it is.
You report each disposal on Form 8949, and the totals carry to Schedule D. Every Form 1040 also asks a yes-or-no question about digital assets near the top of the return, and it applies whether or not you owe anything. Answering it honestly matters, because a "no" next to exchange data that says otherwise is the kind of mismatch that generates a letter.
Why the notice number is usually too high
For years, exchanges reported crypto activity on Form 1099-K. That form shows gross proceeds, the total dollar value that moved through your account, and it says nothing about what you paid. To the IRS matching system, gross proceeds can read like pure income.
Here is the gap in plain numbers. Say you bought Bitcoin for $5,000 and later sold it for $3,000. You have a $2,000 loss. A 1099-K reports the $3,000 of proceeds with no mention of your $5,000 cost. If you traded in and out during the year, the form adds every sale into one large figure. Someone with $60,000 of proceeds and only a small real gain can receive a notice proposing tax on the full $60,000. The way that number comes down is by showing your cost basis, transaction by transaction, so the actual gain is calculated correctly.
Reconstructing basis across exchanges is the whole job for a crypto-tax pro. We'll match you with one who does it every week.
Get matched with a pro who handles it →What Form 1099-DA changes for 2025 and 2026
The reporting picture shifted recently. Starting with the 2025 tax year, custodial exchanges report crypto sales on a new form, Form 1099-DA, and send a copy to the IRS. For 2025 sales, these forms show gross proceeds only, so the basis problem above still applies to the first batch, which reaches taxpayers in early 2026. Cost basis reporting phases in for assets acquired starting in 2026, with those figures appearing on forms in early 2027.
For now, this means the IRS is getting more sale data without the purchase side of the math. Expect more notices from it, not fewer, until basis reporting catches up. Two limits are worth knowing:
- The requirement covers custodial brokers, the centralized exchanges that hold coins on your behalf. After Congress repealed the broker rule that would have swept them in, decentralized platforms and self-custody wallets are not required to issue a 1099-DA.
- Activity spread across more than one exchange, or moved between wallets, will not be captured cleanly, because no single broker sees the whole chain. That is precisely where reported proceeds and real gains drift apart.
If a letter or form looks wrong
The letters come in a few forms, and the number in the corner tells you how urgent it is. A 6174 or 6174-A is educational and needs no reply, though it is a signal to check your past returns. A 6173 has a response deadline and cannot be ignored. A CP2000 proposes a specific tax change based on data the IRS matched to your return, and you agree or disagree by the date printed on it.
What to actually do:
- Read the number and the deadline first. They set everything that follows.
- Pull your own records. Exchange exports and wallet history for the years named in the notice.
- Rebuild your cost basis so gains and losses are correct, not just proceeds.
- Respond in writing by the deadline, with the records that back up your figures.
- Get help if the years are messy. Several exchanges, DeFi activity, or missing basis is exactly when guessing costs money.
If you have been reporting your crypto correctly, a letter is not a crisis. The bad outcomes come from ignoring the deadline, not from owning crypto.