Received potential audit notice for crypto trading in 2021 - made no profit but IRS thinks I earned $46k

Don't panic! This is a common issue with cryptocurrency reporting. What you received is likely a CP2000 notice, which is an automated letter the IRS sends when their records (from exchanges like Robinhood) don't match what was reported on your tax return. The problem is that Robinhood and other exchanges often only report the gross proceeds (total sales) to the IRS without including your cost basis (what you paid). So the IRS sees all your sales as pure profit when they're actually not. The good news is that you have documentation showing your actual losses. You'll need to respond to the notice with a detailed explanation and copies of your 1099 forms showing the correct net loss amounts. If you have transaction records showing the purchase and sale prices of your crypto, include those too. Since you mentioned your mom's accounting agency handles your taxes, I'd recommend involving them in drafting the response. They're familiar with your tax situation and can help prepare the proper documentation. I'm glad to see your update that it's been resolved! For anyone else in this situation, this is exactly why keeping good records of all crypto transactions is so important.

I went through something similar last year! I found this service called taxr.ai (https://taxr.ai) that literally saved me when dealing with crypto tax issues. Their AI can analyze all your crypto transactions and generate the proper tax documents showing your actual gains/losses. When I got a letter from the IRS questioning my crypto trades, I uploaded my exchange statements to taxr.ai and it produced a comprehensive report showing my actual profits/losses. The IRS accepted their documentation without question. Their system specifically handles the Robinhood reporting issue that's causing your problem - where Robinhood reports gross proceeds without cost basis info.

Just wanted to update that I tried taxr.ai after seeing it mentioned here. Had a similar situation with unreported crypto losses from 2022 that the IRS was questioning. The tool was super straightforward - uploaded my Coinbase and Kraken transaction history, and it generated a complete tax report showing my actual losses. The best part was how it formatted everything exactly how the IRS needs it, with all the transaction dates, cost basis, proceeds, and gains/losses clearly laid out. I submitted this with my response to the IRS notice I received, and just got confirmation yesterday that my case was closed with no additional taxes owed. Wish I'd known about this service earlier!

If you're still dealing with the IRS on this, I highly recommend using Claimyr (https://claimyr.com) to actually get someone on the phone. I was in a similar situation with crypto reporting issues, and spent WEEKS trying to call the IRS directly - always got the "high call volume" message and disconnected. Claimyr got me through to an actual IRS agent in about 20 minutes when I had been trying for days. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. The agent was able to see my file, confirm they received my documentation, and actually explain what was happening with my case. Having that direct conversation completely cleared up the confusion around my crypto transactions.

I need to eat my words from my previous comment. After another week of failing to reach the IRS about my own crypto issue (similar to OP's situation), I broke down and tried Claimyr. Not gonna lie, I was SHOCKED when my phone rang 17 minutes later and there was an actual IRS agent on the line. The agent was able to pull up my file immediately, confirm they had received my documentation about the crypto losses, and explained that the system had automatically flagged the transaction amounts but not processed my explanation yet. She put notes in my file to expedite the review and gave me her direct extension for follow-up. Saved me weeks of stress and uncertainty.

FYI - this exact thing happened to me. The issue is that Robinhood (and many exchanges) only report the GROSS proceeds to the IRS on a 1099-K form, not your actual gains/losses. So the IRS computer system sees all your trades as 100% profit. You need to file an amended return with Form 8949 listing ALL your crypto transactions with their correct cost basis. Even though you had losses, you still have to report every single transaction. Then file Schedule D to summarize these transactions. Your losses can actually benefit you by offsetting other income (up to $3k per year).

Question about crypto tax reporting software - has anyone used TaxBit, CoinTracker, or Koinly for situations like this? I'm dealing with something similar from 2022 trades but have about 300+ transactions. Not looking forward to entering all that manually.

This is exactly why crypto tax situations can be so confusing! The IRS automated systems just see the gross transaction amounts from exchanges without the context of your actual cost basis. It's really common for people to get these notices even when they had losses. I'm glad to see from your update that everything got resolved! For anyone else dealing with similar issues, the key is having good documentation of your actual transactions showing the purchase prices, sale prices, and dates. The 1099 forms from exchanges often don't tell the complete story. One thing I learned from my own crypto tax issues is that it's worth reporting losses even if you think you don't need to - they can actually be beneficial for offsetting other gains or reducing ordinary income up to $3,000 per year. Plus it prevents these kinds of automated notices from the IRS in the first place.