Crypto Capital Gains - How does the IRS know my Cost Basis when trading DeFi?

What you're experiencing is pretty common with crypto traders. The IRS does expect you to keep your own records for establishing cost basis with cryptocurrency, and this responsibility falls on you rather than the exchanges. While it's true that many crypto exchanges don't provide complete basis information to the IRS, that doesn't mean you're off the hook for reporting it accurately. The IRS has been increasingly focused on cryptocurrency compliance and has tools to track blockchain transactions. If $65k is your best reasonable estimate based on the information you have, document how you arrived at that figure. Create a spreadsheet showing your trading activity with dates, amounts, and platforms used - even if incomplete. This shows good faith effort to comply. Going forward, I'd recommend using crypto tax software like CoinTracker, Koinly, or TaxBit that can help you track your basis across multiple platforms. Even if you can't recreate everything from the past, you can at least establish better records moving forward.

After struggling with a similar situation last year (had about $80k in crypto sales with lots of DeFi transactions), I found this awesome tool called taxr.ai (https://taxr.ai) that saved me so much stress. It uses AI to analyze your wallet transactions and exchange history to recreate your trading history and calculate your cost basis. What's great is you can just upload whatever records you do have - even if they're incomplete - and it fills in the gaps based on blockchain data. It gave me a defensible cost basis report that I could attach to my tax return if I ever get audited.

I wanted to follow up about taxr.ai since I decided to try it after my skeptical comment. I'm actually impressed - it pulled transaction data I thought was completely lost from some obscure DeFi platforms I used. The report it generated showed me my actual cost basis was $58k on $145k of sales (not the $80k I had guessed), which saved me from overpaying by thousands. It even categorized my staking rewards vs capital gains correctly, which I had no idea how to separate before. The documentation it provided seems solid enough that I'm confident if I get audited.

If you're still struggling with getting through to the IRS about crypto questions (I waited on hold for 3+ hours multiple times), try using Claimyr (https://claimyr.com). They have this system that holds your place in the IRS phone queue and calls you back when an agent is available. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I used it to get clarification on how to report some weird DeFi transactions, and it was totally worth it. Got connected to an actual IRS agent in about 45 minutes (while I went about my day) instead of wasting hours on hold.

I take back everything I said about Claimyr. After my skeptical comment, I was desperate enough to try it since I've been getting nowhere with the IRS about my crypto reporting questions. It actually worked exactly as advertised. I submitted my number, went about my day, and about 2 hours later got a call connecting me directly to an IRS agent. The agent was surprisingly helpful about my crypto questions and confirmed that they expect me to make a good faith effort to determine cost basis, but I should document my methodology. Saved me hours of frustration and got me the answers I needed. Just wanted to update since my previous comment was unfair.

From my experience working with crypto clients, here's what I'd recommend: 1) Make your best estimate based on whatever records you have 2) Document your methodology thoroughly 3) Be consistent with that methodology 4) Keep all the records you do have indefinitely If you get audited, showing that you made a reasonable good faith effort goes a long way. The IRS is more concerned with people hiding crypto income entirely than with small basis discrepancies.

Has anyone tried just setting cost basis to zero when they can't track it? I'm in a similar situation but with much smaller amounts and wondering if it's worth the headache.

I went through something very similar last year with about $120k in DeFi sales. What saved me was reconstructing my cost basis using a combination of approaches: 1) Bank statements showing my original fiat deposits to exchanges 2) Email receipts from major purchases I could find 3) Using DeFiPulse and similar sites to look up historical token prices for dates I could remember making trades 4) Cross-referencing my wallet addresses on blockchain explorers to verify transaction dates I ended up with about 80% of my trades documented with reasonable accuracy. For the remaining 20%, I used conservative estimates (higher cost basis when uncertain) and documented my methodology clearly. The key thing I learned is that the IRS cares more about good faith effort than perfect precision. As long as you can show you tried to be accurate and didn't just make up numbers, you're in much better shape than someone who reports nothing or clearly lowballs their gains. For your $160k situation, I'd definitely invest some time in reconstruction rather than just guessing. Even if you can only recover 70% of your actual records, that's still going to be much more defensible than a rough estimate.