Understanding IRS Crypto Warning Letters

In the last two months, CoinLedger has observed a 758% increase in U.S. users receiving warning letters from the IRS regarding cryptocurrency tax issues. This trend is corroborated by various accounting firms. Despite discussions about abolishing crypto taxes, no laws have yet been passed. Many investors mistakenly believe they don't need to report crypto for taxes, leading to rising anxiety due to IRS letters. New regulations like the 1099-DA form establish stricter reporting requirements starting in 2026, demanding brokers report detailed transaction data to the IRS. Several types of IRS notices vary in severity. Letter 6174 is educational, advising investors of taxable transactions without suggesting misconduct. Letter 6174-A implies potential underreporting but requires no response; however, reviewing and possibly amending past filings is wise. More serious notices, such as Letter 6173 and CP2000, warrant prompt responses to avoid audits and penalties. Shocked recipients often are not evaders but rather everyday investors unaware of past minor mistakes or unaware of cost basis documentation needs. To address inaccuracies, taxpayers can provide documentation like trade history or amend previous returns with Form 1040X. Less severe notices can often be resolved independently or via tax software, while serious ones may require professional assistance. Increases in unrealized gains and losses in portfolios highlight the importance of precise reporting. Keeping comprehensive records is essential to prevent IRS issues.