The IRS recently sent out thousands of letters to crypto currency investors. These are called CP2000 letters. If you received one, here’s what to do next. (If you didn’t receive one, make sure you bookmark this article. They will continue to send them and you may be next.)
If the IRS is correct, you can simply fill-in the form they sent you, sign it and mail it to the IRS along with the tax due.
If you don’t have all of the money now, send what you can and mail it in with the form. The IRS will contact you and you can arrange for payment at that time. If you can pay it all within a few months, you won’t need to have a formal arrangement. That is easiest for all involved.
If the CP2000 is incorrect, complete the form and include a statement that explains why you do not agree. You’ll need to sign the form and the statement. Include supporting documentation with your form and letter.
The documentation will win or lose your argument, so you want to make sure the schedules and documentation are clear and complete. Include all wallet activities and transactions on all exchanges (not just the one they may be inquiring about).
At this point, you don’t need to file an amended return. But, if you do, use Form 1040X and write “CP2000” at the top of the return.
Most letters will be incorrect because they are relying on Form 1099-Ks from the vendors. They do not include cost basis which is a necessary part of determining the gain when you sell. The formula is Sales price – cost of sales – cost basis = gain.
You need to fully calculate all gain and loss on sales in order to accurately represent how much is actually taxable.
Keep an eye out for my latest book, “Heads and Tales from the Crypto Currency.” It is due out later this year.