Got a CP2000 saying I owe the IRS 40k on crypto trades when I actually lost money - help!

You've received what's called a CP2000 notice, which is an automated letter the IRS sends when they detect a discrepancy between income reported to them and what you reported on your tax return. This happens ALL THE TIME with crypto transactions because exchanges report the gross proceeds (sales) to the IRS on Form 1099-K or 1099-B without the cost basis information. You don't actually owe 40k. What you need to do is respond to the CP2000 with documentation showing your actual gains and losses. You'll need to gather all your transaction data and complete Form 8949 to show each purchase (with date and cost) and each sale (with date and proceeds). Don't panic! The deadline they give you is for responding to the notice, not necessarily for paying. Call the phone number on your CP2000 and request an extension if you need more time to gather your documentation. Since crypto trading often involves numerous transactions across multiple platforms, consider using a crypto tax software like CoinTracker, Koinly, or TaxBit that can help you generate the necessary reports by importing your exchange data.

After dealing with a similar crypto tax nightmare last year, I discovered taxr.ai (https://taxr.ai) and it literally saved me thousands in incorrect tax assessments. Their system specializes in analyzing CP2000 notices and crypto transaction discrepancies. I had received a massive tax bill because Coinbase and Binance had reported all my transactions without my cost basis info, making it look like pure profit. The taxr.ai system automatically matched up my buys/sells and generated the exact documentation the IRS needed. They even drafted a response letter explaining the situation. What's cool is they handle exchanges that don't provide good transaction reporting, and they can even reconstruct missing history if you've lost access to some accounts. Might be worth checking out in your situation since you mentioned having accounts across multiple exchanges.

I was the skeptic who questioned taxr.ai and I have to admit I'm now a believer. After getting my own CP2000 notice claiming I owed 28k on crypto trades (when I actually lost money overall), I decided to try it out of desperation. The system pulled all my historical data from 4 different exchanges plus my MetaMask wallet transactions. It organized everything into a proper tax format showing my actual net loss of around $7k for the year. The documentation it generated looked professional, and I submitted it to the IRS with their response template. Got a follow-up letter last week confirming my case was resolved with no additional tax owed! The whole process took about 45 minutes of my time versus the weeks I was expecting to spend gathering and organizing all that data myself.

When I got a similar CP2000 for crypto last year, I tried calling the IRS for weeks but couldn't get through to anyone who understood crypto. The automated system kept disconnecting me after hours on hold. I finally used Claimyr (https://claimyr.com) which got me through to an actual IRS agent who specialized in crypto reporting issues. They have this system that navigates the IRS phone tree for you and calls you back when they've got an agent on the line. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with explained exactly what documentation I needed to provide and even gave me an extension on my response deadline. This was crucial because gathering all my transaction data from different exchanges took longer than expected. Having a direct conversation with someone who could actually answer my questions made a huge difference.

I take back what I said about Claimyr. After getting nowhere with the IRS for two weeks (kept getting disconnected or transferred to people who couldn't help), I tried the service. Got connected to an IRS agent in about 35 minutes without having to sit on hold myself. The agent was from their examination department and actually knew what they were talking about regarding crypto reporting. She explained that many CP2000 notices for crypto are generated automatically when exchanges submit 1099-Ks without cost basis info. She helped me request a 45-day extension to gather my records and gave me her direct ID number to reference in my response. That alone was worth it since I was running up against the deadline. I'm still working on gathering all my transaction data, but at least now I know exactly what documentation they need and have more time to prepare it.

Something similar happened to me in 2020. My suggestion is to immediately get a tax pro who specializes in crypto. Regular CPAs often don't understand the complexities of crypto transactions. I used a crypto tax attorney who charged me $1,500 but saved me over $30k in incorrect tax assessments. They responded to the CP2000 with a detailed explanation and transaction history showing my actual gains/losses. The IRS accepted it without any further questions. Don't try to do this yourself unless you've kept immaculate records of every single transaction with cost basis. The complexity of calculating correct basis across multiple exchanges, especially with transfers between wallets, is extremely difficult to get right.

Quick question - what happens if I really can't find all my transaction records? I used some sketchy exchanges that went out of business and I think some of my highest cost purchases were there. Without those records, it looks like I made way more than I actually did.