That's a great point! He definitely had some expenses - mostly software subscriptions and a new laptop he had to buy specifically for this job. I wasn't sure if we could deduct the full cost of the laptop or if we needed to depreciate it.

For the laptop, it depends on when he purchased it and how much it cost. If it was under $2,500, you can potentially use Section 179 to deduct the full cost in one year, assuming it was used more than 50% for business. For the software subscriptions, those are generally fully deductible as business expenses in the year paid. Just make sure you keep receipts for everything. You might also want to look into home office deduction if he was working from home - you can either use the simplified method ($5 per square foot up to 300 square feet) or the regular method which calculates the actual expenses.

Is there any way to reduce the self-employment tax hit? That 15.3% is brutal when you're already paying regular income tax too.

That's actually a really smart idea I hadn't considered. I could probably scrape together about $3,000 by the deadline. Would I just make a partial payment through the IRS website and then pay the remainder later? Or do I need to indicate somewhere that it's a partial payment?

Just make the payment through the IRS Direct Pay or another official payment method for whatever amount you can afford. There's no need to mark it as "partial" - the IRS system automatically matches your payments to your tax liability and will show any remaining balance due. Then when you get the rest of the money, make another payment for the remaining balance. The penalties and interest will only apply to the unpaid portion. Both payments would be made exactly the same way - there's no special process for making multiple payments.

For a 4-day late payment of $5,650, the math works out to: Failure-to-pay penalty: 0.5% per month, prorated for 4 days = about 0.067% × $5,650 = $3.78 Interest: Currently about 7% annually, prorated for 4 days = about 0.077% × $5,650 = $4.35 So total damage would be roughly $8.13 if paid exactly 4 days late.

What kind of resources did you need to dedicate to get this off the ground? We've thought about it but worried about the compliance risks given how the IRS is scrutinizing these claims.

We started with one full-time CPA who spent about 8 weeks becoming our in-house expert (lots of CPE, IRS notice reading, and conference attendance). Then added a dedicated admin person for documentation collection and organization. The compliance risk is manageable if you're conservative and thorough with documentation. We built a 27-point checklist that every claim must satisfy before filing. It took about $30K in startup costs (mostly training and building templates/processes), but we've generated over $400K in fees since starting 14 months ago.

This is so important. We had a similar disaster with an ERC firm that disappeared when the audits started coming in. What red flags should people watch for when vetting these firms?

Did you have to provide a lot of documentation to get them to issue the corrected form? My exchange seems completely unwilling to even look at the problems.

I had to be pretty persistent and provide very specific evidence. For each transaction they had wrong, I included screenshots from my wallet showing the actual transactions with timestamps and transaction IDs. I also had to escalate beyond the first-level support to their specialized tax team. The key was being extremely organized and specific - I created a spreadsheet showing exactly what was incorrect on the 1099 versus what actually happened, with links to blockchain evidence. Don't just say "there are errors" - show exactly what's wrong with proof. And don't give up after the first automated response!

I used CoinTracker last year and it was hit or miss. It's good for organizing transactions but doesn't really "solve" the problem of incorrect 1099s. You still have to manually identify and fix discrepancies, which can be super time consuming if you have lots of transactions.

Thanks for sharing your experience. Sounds like these tools help organize things but don't solve the core issue of exchange reporting errors. I was hoping there might be a simpler solution than manually reconciling everything.

Thanks for this! Did you have to specifically ask your attorney to break it down this way? My lawyer seems focused only on getting the highest dollar amount and doesn't seem to understand or care about the tax implications.

Yes, I had to specifically ask - actually, I had to insist on it. Most attorneys are focused solely on the gross settlement amount rather than your net after taxes. I ended up printing out IRS Publication 4345 "Settlements — Taxability" and bringing it to my attorney to show him exactly what I needed. Even if your attorney isn't knowledgeable about tax implications, you can request that the settlement agreement specifically allocate amounts to different categories. For example, you want as much as possible categorized as "compensation for diminution in property value due to undisclosed defects" rather than "damages for fraud." The former is more likely to be treated as a reduction to basis while the latter might be considered ordinary income. Don't be afraid to push back - this is your money and your tax situation!

You're right that the Tax Cuts and Jobs Act severely limited casualty loss deductions for tax years 2018-2025. For non-business casualties, they're only deductible if they result from a federally declared disaster. This is why structuring the settlement properly is so important. What you can't claim as a casualty loss might still be handled favorably if properly categorized as a recovery of capital or reduction in basis. However, fraud victims specifically have had a tough time under current tax law since the casualty loss limitations went into effect.