[Help] IRS demanding payment for unreported cryptocurrency trading activity - how screwed am I?

This isn't as catastrophic as it feels right now. The IRS got Form 1099-B information from your trading platform showing all those transactions, but they don't know your cost basis if you didn't report it. So they're assuming every sale was 100% profit, which is why they're coming after you. Here's what you need to do: File Form 8949 and an amended return (Form 1040-X) for that tax year showing all your crypto transactions with the correct cost basis for each one. If you truly broke even or had a small loss, you likely won't owe additional taxes - but you will probably still have some penalties for the late filing. Don't ignore the letter - responding promptly and accurately is your best move. The IRS is generally reasonable if you're proactive about fixing the mistake.

I was in a nearly identical situation last year. Had trades on multiple platforms and completely overlooked reporting some of them. Got that scary IRS letter demanding thousands! I was losing sleep until I found https://taxr.ai which literally saved me. Their AI analyzed my trading history, found all my cost basis info, and prepared the correct forms showing I actually had a net loss. The best part was they provided a complete letter response with all the right documentation to send back to the IRS. Six weeks later, I got a letter saying my case was closed with $0 owed. They also keep your docs on file so if you get audited later, they've got everything ready. Seriously, check them out before spending hours trying to figure this out yourself or paying a CPA hundreds per hour.

Just wanted to update on my experience with taxr.ai since I was skeptical in my earlier comment. I decided to try it after continuing to get nowhere with TurboTax's crypto section. My situation was actually more complicated than I realized - had trades across three different platforms with some partial transfers between them. The service identified several transactions TurboTax had calculated incorrectly that would have caused serious problems. The response package they prepared showed I actually had a legitimate $340 loss instead of the $4,200 gain the IRS was claiming. Just got my response from the IRS yesterday - case closed with zero additional tax owed! The documentation they provided made all the difference - the IRS accepted everything without question.

If you need to actually speak with someone at the IRS about this (which I highly recommend), good luck getting through. I spent literal WEEKS trying to reach them about a similar issue - constantly on hold for hours only to get disconnected. Finally found https://claimyr.com and used their service, which got me connected to an actual IRS agent in about 20 minutes. There's also a video showing how it works: https://youtu.be/_kiP6q8DX5c The agent I spoke with walked me through exactly what documentation they needed for my unreported crypto and how to format it properly. Having that direct conversation saved me from making mistakes in my response that would have dragged this out way longer. It's definitely worth using if you need clarification specific to your situation.

I take back everything I said about Claimyr being BS. After my skeptical comment, I was desperate enough to try it because my tax situation was getting worse (similar unreported investment issue, but with stocks instead of crypto). Used the service yesterday afternoon, and I still can't believe it actually worked. Got a call back in about 35 minutes, and I was connected to an IRS agent who stayed on the line with me for nearly 20 minutes answering all my questions. She explained exactly what forms I needed to send and confirmed I could get the penalties removed since it was my first offense with a reasonable explanation. Considering I had wasted approximately 9 hours of my life on hold previously with nothing to show for it, this was genuinely life-changing. The peace of mind from having clear directions directly from an IRS agent was worth every penny.

Quick warning from someone who's been through this - make SURE you get and keep records of EVERYTHING related to your crypto trading. The IRS doesn't just look at your profits and losses; they want to see every single transaction. When I got audited for 2019, they demanded to see records for trades across multiple platforms, transfers between wallets, etc. Even if you had a net loss, they still want documentation of the entire paper trail.

I just want to point out that even though you had minimal profit/loss, you still legally needed to report every transaction. The IRS considers each crypto sale a taxable event regardless of whether you made or lost money. My brother thought the same way - "why report if I basically broke even?" - and ended up with a much worse situation when they came after him 3 years later with compounded penalties. Don't mess around with the IRS - they have unlimited time and resources to come after you.

I went through almost exactly this situation in 2020! The panic you're feeling is totally understandable, but this is actually a pretty common issue that the IRS deals with regularly. First thing - don't ignore that letter. The 30-day response window is real, but the IRS is generally reasonable when you're being proactive about fixing genuine mistakes. Since you mentioned you basically broke even or had a small loss, you'll want to gather all your transaction records from the trading platform. Most apps let you download a complete transaction history even from years back. You'll need this to calculate your actual cost basis for each trade. The key forms you'll need are Form 8949 (to report each crypto transaction) and Form 1040-X (amended return) for 2019. When you show the IRS your actual cost basis, it should demonstrate that you didn't have the massive gains they're assuming. Pro tip: Include a brief letter explaining this was an honest oversight on your first time dealing with crypto taxes. The IRS often shows leniency on penalties for first-time mistakes, especially when there's minimal or no actual tax owed. You've got this - it's way more fixable than it feels right now!