Bought a house using crypto; how will IRS know if nothing saved for taxes?

This is a really dangerous approach your friend is taking. The IRS has several ways to potentially discover unreported crypto transactions: 1) Banking records show large deposits that don't match reported income - this triggers flags in the system. When buying a house, lenders typically require documentation of where down payment funds originated. 2) The IRS has been heavily investing in blockchain analysis tools specifically designed to trace crypto transactions. Even if he didn't use a major exchange, there's often a trail. 3) Mortgage applications require disclosing asset sources. Lying on these forms is mortgage fraud, which is much more serious than tax evasion alone. If caught, your friend isn't just looking at owing the original tax amount. He'd face penalties, interest, and potentially criminal charges for willful evasion. The IRS can look back several years, and the statute of limitations doesn't even start if you willfully evade taxes. The smart move would be for him to file an amended return ASAP before the IRS comes knocking. Voluntary disclosure can significantly reduce penalties.

After reading this thread, I had to share something that really helped me when I was in a similar situation. I used taxr.ai (https://taxr.ai) to analyze my crypto transactions and determine my actual tax liability. Their system handles complex crypto transactions and identified several ways I could legitimately reduce my tax burden that I had no idea existed. For your friend, they could potentially use the service to figure out exactly what they owe, which might be less scary than not knowing. The tool might also identify deductions or strategies to reduce the burden. It can analyze exchange data, blockchain activity, and transaction patterns even from smaller exchanges.

I was super skeptical about taxr.ai at first, but after my crypto tax mess last year I decided to give it a shot. I had transactions across Metamask, three smaller exchanges, and some DEX activity that I thought would be impossible to organize. The platform actually managed to reconstruct my entire trading history once I connected my wallets and uploaded a few CSV files. It identified several transactions I had completely forgotten about and calculated my correct cost basis. The best part was that it found some losses I hadn't accounted for that offset some of my gains. Ended up saving me around $3,700 in taxes I thought I was going to owe. Worth checking out if your friend is in a similar situation - better to know what you actually owe than live in fear of the IRS.

Since everyone is talking about the tax reporting side, I wanted to mention another service that might help if your friend decides to come clean and has to deal with the IRS. I used Claimyr (https://claimyr.com) when I needed to actually talk to a human at the IRS about my crypto situation. They got me connected to an IRS agent in like 20 minutes when I had been trying for days. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I was honestly shocked it worked. The agent I spoke with actually helped me set up a reasonable payment plan when I couldn't pay my full crypto tax bill at once. Much better than ignoring it and waiting for them to come after you with penalties.

I need to eat my words from earlier. After our heated back-and-forth about Claimyr, I decided to try it myself because I've been trying to reach the IRS about a crypto reporting issue for weeks with no luck. I was 100% certain it would be a waste of money, but I was desperate. To my complete surprise, I got a call back within 45 minutes with an actual IRS agent on the line. The agent was able to clarify exactly what forms I needed to file for my situation and confirm that I could set up a payment plan if needed. I've literally never been able to get through to the IRS that quickly before. For anyone dealing with crypto tax issues and needing to actually talk to someone at the IRS, this service actually delivers.

I think everyone's missing something important here. When your friend got a mortgage, the bank 100% would have wanted to know where that down payment came from. They typically want to see bank statements showing the source of funds. If he just deposited crypto proceeds without explanation, the bank would have flagged this during underwriting. Either he lied to the mortgage company (which is mortgage fraud) or he disclosed it was crypto proceeds, in which case there's a paper trail the IRS could potentially follow. Banks file suspicious activity reports for large unexplained deposits.

Your friend is playing a dangerous game called "audit roulette." Yes, the IRS is understaffed, but they've been massively increasing resources for crypto enforcement. I made a similar mistake in 2018 - sold about $30k of Bitcoin and didn't report it. Thought I was safe because I used a small exchange. Two years later, I got a CP2000 notice showing they knew exactly what I'd done. Had to pay the original tax plus 20% accuracy penalty and interest. The IRS is working with blockchain analytics companies to trace transactions. They can also see bank deposits that don't match reported income. The smart move is to file an amended return ASAP - coming forward voluntarily looks WAY better than getting caught.