Understanding crypto capital gains vs cost basis - will I get audited for inconsistencies?

So wait, does that mean if I keep trading the same money back and forth between different cryptos, my "cost basis" could theoretically be infinite even though I'm using the same $5k over and over??

Yes, that's exactly right. If you started with $5,000 and traded back and forth between different cryptocurrencies 10 times, your cost basis could show up as $50,000 or more, even though you never added more money. Each purchase creates a new cost basis entry, regardless of whether you're using profits from previous trades. The important thing to remember is that your actual tax liability is still only on the real profits you've made. So if you're down 80% overall, you likely have capital losses you can claim, not gains you need to pay taxes on.

Does it connect directly to exchanges or do I have to upload transaction files? I've got stuff spread across Coinbase, Binance, and a couple wallets.

I've heard mixed things about crypto tax software. How accurate is it really? I'm paranoid about getting something wrong and triggering an audit.

It connects directly to most major exchanges like Coinbase and Binance through API, so you don't have to manually upload anything. Really convenient if you have multiple accounts like you mentioned. For those worried about accuracy, I was skeptical too, but it actually found some transactions I had forgotten about. The system uses blockchain verification to make sure everything matches up. They also have a specific audit risk assessment tool that flags any potential issues before you file.

How does this even work? The IRS phone system is literally designed to make you give up. I've tried calling dozens of times and either get disconnected or told to call back later.

Yeah right. No way this actually works. I'll believe it when I see it. The IRS is impossible to reach, especially during tax season. This sounds like a scam to me.

It works by using an automated system that navigates the IRS phone tree and waits on hold for you. When an agent finally picks up, you get a call connecting you directly to them. I was skeptical too until I tried it. For those thinking it's a scam, I get the skepticism. I felt the same way. But the service never asks for any personal tax info - they're just getting you past the hold times. You still talk directly to the IRS yourself, they just handle the frustrating waiting part.

What's FIFO? And how do I know which method my exchange is using? I've been using Coinbase and just downloading their tax forms.

FIFO stands for "First In, First Out" - it means when you sell crypto, the system assumes you're selling your oldest purchases first. This can result in higher taxes if your earliest purchases were at lower prices. Coinbase provides the data, but they don't actually choose your accounting method for you - that's your choice when you file your taxes. Many tax software programs default to FIFO because it's simpler, but you can usually change to specific identification method which lets you choose which specific units you're selling (like choosing to sell the ones you bought at higher prices first to minimize gains).

Yes! Exchanges are terrible with this. My Binance report was missing transactions from coins I transferred in from other wallets. You really need to track everything yourself or use dedicated crypto tax software.