Crypto IRS Audits

How a crypto inquiry starts: letters, notices and audits

Most people who hear from the IRS about crypto have not been audited. The IRS uses three different tools, and the response is different for each:

The IRS voluntary compliance letters page states plainly that such a letter “isn’t an audit of your tax return or of your failure to file one.” A CP2000 is also not an audit: it proposes changes based on information returns. Both can still end in a tax bill, and an unanswered Letter 6173 can be referred for examination.

Letters 6173, 6174 and 6174-A: what each one asks

The IRS began sending these letters in July 2019 (IR-2019-132), saying more than 10,000 taxpayers would receive them, and it still lists all three on its voluntary compliance letters page. The sample versions posted on IRS.gov (revision 6-2019) read as follows; the letter you receive controls if it differs.

Letter 6173

This is the only one with a deadline. It says the IRS has not received a return or a form or schedule reporting your virtual currency transactions for the listed years, and asks you to do one of three things by the “respond by” date:

• file any missing returns and report the transactions;
• file an amended return if you made a mistake, writing “Letter 6173” at the top of the first page; or
• if you believe you reported correctly, send a statement of facts with a history of the crypto income you reported and copies of what you filed, signed under penalties of perjury.

The sample letter says statements will be checked against information from banks, financial advisors and other sources, that you can ask for a 30-day extension by the respond-by date, and that if the IRS does not hear from you it “may refer your tax account for examination.” You may send a Form 2848 so a representative can answer for you.

Letters 6174 and 6174-A

Both explain how crypto is reported (Schedule C for crypto received as a contractor, Schedule D for sales and exchanges, Schedule E for some supplemental income) and tell you to amend or file if you find you did not report correctly, writing the letter number at the top of the return. Letter 6174-A is the firmer version: it says you may not have properly reported your transactions and adds that the IRS may send further correspondence about potential enforcement. Both sample letters say you do not need to respond.

“No response needed” is not the same as “nothing to do.” If a review of your records shows unreported disposals, amending now, before any exam contact, is usually the cheaper path; see amended returns and audits.

What the IRS checks in a crypto audit

The IRS digital assets page sets the starting rule: “For U.S. tax purposes, digital assets are considered property, not currency.” A digital asset is any digital representation of value recorded on a cryptographically secured distributed ledger, including cryptocurrency, stablecoins and NFTs. From that rule, an examiner works through these points:

• The digital asset question. Form 1040 asks whether, during the year, you received a digital asset as a reward, award or payment, or sold, exchanged or otherwise disposed of one. A “No” next to exchange records showing trades is the first thing that stands out.
• Every disposal, not just cash-outs. Selling for dollars, swapping one coin for another and paying for goods or fees with crypto are all disposals reported on Form 8949. The IRS says you must report digital asset transactions “whether or not they result in a taxable gain or loss.”
• Income received in crypto. Crypto received as pay, rewards or from airdrops is ordinary income at its fair market value in US dollars when received. If you received it as an independent contractor, the 6174 letters note it is self-employment income, subject to self-employment tax (15.3% (IRS.gov, 2026)).
• Basis and holding period. Basis is what you paid, including fees and commissions. Assets held more than one year give long-term gain; one year or less gives short-term gain taxed at ordinary rates.
• Transfers between your own wallets. These are generally not taxable unless you paid the fee in crypto, but you need records to show the transfer was to yourself and not a sale.
• Accounts abroad and foreign platforms. The letters stress the obligation applies whether the account is in the US or abroad, and the IRS says trades through foreign brokers must be reported even if no Form 1099-DA is issued.

If you report crypto as a business, the general Schedule C issues in self-employed audits also apply.

Cost basis: Form 1099-DA, wallet-by-wallet tracking and the records that work

Form 1099-DA is how brokers report digital asset sales to you and the IRS. Per the IRS digital assets page, brokers must report gross proceeds for transactions on or after January 1, 2025, and basis for certain transactions on or after January 1, 2026. The Form 1099-DA instructions (reviewed 30 April 2026) limit basis reporting to “covered securities”: digital assets acquired after 2025 in an account where the broker provided custody and held there until the sale. For other assets the broker does not have to report basis.

That gap matters in an audit. If the IRS sees proceeds and no basis on your return, it may treat the full proceeds as gain. Your job is to prove the cost.

Wallet-by-wallet basis from 2025

Final regulations (Treas. Reg. 1.1012-1(j), T.D. 10000) generally apply to digital assets acquired or transferred on or after January 1, 2025: basis is identified within each wallet or account, not across all of your holdings. Rev. Proc. 2024-28 gave a safe harbor for allocating the unused basis you held on January 1, 2025 to each wallet or account. That safe harbor does not cover basis already under consideration in an exam the IRS opened before January 1, 2025, in Appeals or in court, unless finally determined in time. For older transactions, the IRS virtual currency FAQs (which apply generally to transactions before 2025) allow specific identification if you can document the units; otherwise units are treated as sold first in, first out.

The IRS FAQs say the law requires records “sufficient to establish the positions taken on tax returns.” If an exchange has shut down, see audits with missing records for rebuilding from bank statements and third-party data. Never create or backdate records.

Wash sales and crypto: the current rule

The wash sale rule in IRC 1091 disallows a loss when you buy substantially identical property within 30 days before or after the sale. As read on law.cornell.edu on 25 October 2026, the statute applies to “shares of stock or securities” and does not mention digital assets. The IRS digital assets pages we checked do not address wash sales at all.

Bills in Congress would extend IRC 1091 to digital assets; we found none enacted as of 25 October 2026. Two cautions: a token that is itself a security, or a fund or other security that holds crypto, is a different question, and the law may change. Check the current statute before relying on a loss from selling and quickly rebuying the same coin.

Common adjustments, penalties and a worked example

Crypto exams usually produce some mix of these changes:

• Unreported disposals added as gain, sometimes with zero basis if you cannot prove cost.
• Long-term gain recharacterized as short-term when acquisition dates cannot be shown.
• Staking, reward or contractor income added at fair market value, plus self-employment tax where it was business income.
• The accuracy-related penalty under IRC 6662: 20% (IRS.gov, 2026) of the underpayment caused by negligence, which the statute says includes “any failure to make a reasonable attempt to comply,” or by a substantial understatement (for individuals, more than the greater of 10 percent of the correct tax or $5,000). Reasonable cause and good faith is a defense.
• Interest from the return’s due date at the federal short-term rate plus 3 percentage points, reset quarterly (7% (IRS.gov, Jul-Dec 2026) this quarter).

If the IRS argues fraud, the stakes change completely; that is the point to stop answering questions yourself and get a tax attorney.

How to respond to a crypto audit

1. Identify what you have. Compliance letter, matching notice or exam letter? The table at the top tells you which rules apply. Calendar the date on it.
2. Pull IRS records. Get your wage and income transcript to see which 1099-DA, 1099-B, 1099-MISC or 1099-K forms the IRS has; see IRS transcripts.
3. Export everything. Download full histories from every exchange and wallet for every year in question, plus the bank records showing money in and out.
4. Rebuild each disposal. Date, units, dollar proceeds, dollar cost, holding period and the wallet or account it came from. Note the identification method you used.
5. Answer only what is asked. Respond to each item in the letter or IDR, numbered to match, with a cover letter (use our audit response cover letter). Keep a copy of everything sent.
6. Decide on the result. If you get a report, read Form 4549 line by line and see agree or appeal if you disagree.

Once an exam has started, a new amended return does not work the way it would have before: give corrections to the examiner, who keeps an amended return with the case file. The details are in amended returns and audits.

Handling it yourself or getting help

A Letter 6174 with nothing wrong in your records needs no reply. A CP2000 where you simply left out basis can often be answered yourself with exchange records. Help is worth considering when the IRS has opened an exam covering several years, records are incomplete, you used foreign platforms, or the letter suggests intentional non-reporting. Low Income Taxpayer Clinics represent eligible taxpayers in audits for free or a small fee, and the Taxpayer Advocate Service (877-777-4778 (IRS.gov, 2026)) helps when an IRS problem is causing hardship.

Global Gate Tax Relief’s team includes licensed tax attorneys, enrolled agents and CPAs. It offers a free consultation, files Form 2848 and pulls your transcripts if engaged, and quotes a flat fee upfront; it does not promise outcomes. Request a free consultation or call 1-877-800-8180. If the audit is already over and you owe, see options if you can’t pay the result.

Frequently asked questions

Keep reading in the IRS Audit Guide

• Crypto tax balancesPaying a crypto tax bill, losses and the catch in selling to pay.
• Amended returns and auditsQualified amended returns, the 60-day rule and amending during an exam.
• Audits with missing recordsHow to rebuild and prove what you paid.
• Form 4564: Information Document RequestHow to answer an examiner's document request.
• Audits by issueWhat the IRS checks item by item.