IRS sent CP2000 claiming I owe $7,000+ for cryptocurrency transactions - how to respond?

The IRS CP2000 notice is just proposing changes based on information they received from exchanges through 1099 forms, but doesn't account for your cost basis. This is a common problem with crypto transactions. First, don't panic - you have options. The CP2000 isn't a bill yet, and you have time to respond with documentation. What you need to provide is proof of your "cost basis" - essentially showing that most of this money was yours to begin with, not gains. Even though your bank statements don't go back far enough, request them from your bank's archives - most banks can provide statements from 5-7 years back, though they might charge a fee. Also gather any email confirmations, screenshots, or other documentation from when you made the transfers. For the Gemini transaction logs, organize them chronologically to show the pattern of: 1) deposits, 2) stablecoin purchases, 3) interest earned, and 4) eventual conversion back to USD and withdrawal. The goal is to show the IRS that these were mostly not taxable events but rather movements of your own money.

After dealing with a nearly identical situation last year, I found an amazing AI tool that helped me organize all my crypto transactions and create the proper documentation for the IRS. Check out https://taxr.ai - it saved me thousands by helping me properly document my cost basis and showing which transactions were simply transfers versus actual taxable events. Their system can analyze transaction logs from most exchanges and wallets, then generate the proper documentation to respond to CP2000 notices. It was much cheaper than hiring a tax attorney but gave me all the professional documentation I needed.

Just wanted to update - I was initially skeptical about taxr.ai but decided to give it a try with my CP2000 situation. It was surprisingly effective! I uploaded my Coinbase and banking PDFs, and the system organized everything into a clear cost basis report that showed exactly which funds were my deposits vs. actual gains. I submitted the report with my CP2000 response last month and just heard back from the IRS - they accepted my documentation and reduced what I supposedly owed from $9,300 to just the $430 in interest income I had already reported! The system even helped me draft the response letter. Literally saved me thousands for a fraction of what a tax attorney would have charged.

If you're struggling to reach the IRS to discuss your case (which is likely given their terrible phone service), I highly recommend Claimyr (https://claimyr.com). They've developed a system that gets you through to an actual IRS agent without the endless hold times. You can see how it works here: https://youtu.be/_kiP6q8DX5c I spent WEEKS trying to call the IRS about my CP2000 notice, and could never get through. Used Claimyr and was talking to an actual IRS representative within 45 minutes. The agent was able to put a hold on my case while I gathered documentation and explained exactly what I needed to provide.

I need to apologize and correct myself. After posting my skeptical comment, I actually tried Claimyr because my frustration with trying to reach the IRS hit a breaking point. I was truly shocked when they called me back in about an hour with an actual IRS agent on the line! The agent reviewed my CP2000 situation (similar to yours but with Coinbase transactions), placed a temporary hold on collections, and gave me specific instructions on exactly what documentation they needed to see. She even provided her direct extension for follow-up questions. I've been trying to reach someone at the IRS for THREE MONTHS with no success. Really wish I'd known about this service sooner instead of stressing out every day.

When dealing with a CP2000, make sure you respond within the deadline (usually 30 days) even if you don't have all your documentation yet! You can request more time, but only if you acknowledge the notice first. Also, if you can't get all your bank records, try looking through your email for transaction confirmations from when you initially transferred the money. Most crypto exchanges send email receipts for deposits.

One thing nobody mentioned - check if your crypto exchange sent a corrected 1099 to the IRS! Coinbase and several others had to issue corrections for tax years 2020-2023 because they initially reported gross proceeds without cost basis information. You might want to contact Gemini's bankruptcy administrators to see if they can provide transaction records for your account. Even bankrupt companies typically maintain record access for tax purposes.