IRS Notice CP2000 for Cryptocurrency - What Do I Do?

Recently the IRS has started sending out letters to more than 10,000 cryptocurrency holders alerting them that they may not have properly reported their crypto holdings and transactions on their tax return. Notice CP2000 is the latest version of these letters which appears to be more serious than the earlier 6174 and 6174-A crypto letters.

This guide walks through these letters, how cryptocurrency is treated for tax purposes, and what you can do about CP2000.

Notice CP2000 

Unlike the letters that the agency sent out in late July, Notice CP2000 specifies amounts that individuals supposedly owe the IRS. 

This new IRS notice is intended for the occasion when there are discrepancies between the information taxpayers report on their tax return and the information the agency obtains independently from third parties (from 1099-K’s that the government receives from cryptocurrency exchanges). The amount stated on the notice is the proposed amount that the IRS believes the taxpayers owe, although taxpayers can dispute the amounts within 30 days of receiving the notice. The agency warns that failing to respond to the letter may incur further interest owed and penalties. 

How is the IRS Aware of My Cryptocurrency Transaction History?

Popular exchanges like Coinbase, Gemini, and others send the government a Form 1099-K and other 1099s detailing the gross amounts of your transactions on the exchange. This includes all buys, sells, transfers etc, and as a result, this number reported on 1099-K can be extremely high. Exchanges will often also send you a copy of this 1099-K.

1099-K DOES NOT represent your gains or losses from buying and selling cryptocurrency. It solely reports the gross proceeds from all transactions you’ve made on the network.

The IRS is aware of your cryptocurrency transactions because of these 1099-K’s that are sent to them.

How Is Cryptocurrency Taxed in the U.S.?

The IRS treats cryptocurrencies as property for tax purposes, not as currency. Just like with other forms of property—stocks, bonds, real estate—you incur a tax reporting liability when you sell or trade your cryptocurrency for more or less than you acquired it for.

For example, if you purchased 0.1 Bitcoin for $1000 in April of 2018 and then sold it two months later for $2,000, you have a $1,000 capital gain. 

You report this gain on your tax return, and depending on what tax bracket you fall under, you will pay a certain percentage of tax on the gain. Rates fluctuate based on your tax bracket as well as depending on whether it was a short term vs. a long term gain. 

In order to report these gains and losses on your taxes, you need to have records of your cost basis and fair market value for each sell or trade of your cryptocurrencies at the time of sale. Cost basis is simply the amount of money you put in to acquire the asset. Fair market value is just the dollar value that you received upon sale or disposition of the asset. 

Staying with the example above, your cost basis is $1,000, and your fair market value is $2,000. You would report each of these figures along with the $1,000 gain from the transaction on your tax documents. You report these transactions on Form 8949. This process should sound familiar if you invest in or trade stocks, as it is the same reporting process that stock traders go through.

You can read our Cryptocurrency Tax Guide for a more complete and thorough overview.

What Should I Do About CP2000?

The first thing you should do is actually calculate the correct amount of taxes you owe on your cryptocurrency gains. 

Because 1099-K’s from cryptocurrency exchanges are often incredibly misleading and not relevant for capital gains and losses reporting, there is a high probability that the amount the IRS is claiming you owe is incorrect. 1099-K’s do not take cost basis information into account which is essential for accurate gains/losses reporting.

To actually calculate what you owe in taxes, you can follow the above example to calculate your capital gains and losses for each cryptocurrency trade and taxable event you incurred over the past years. 

If you don’t want to do these calculations by hand, you can also use cryptocurrency tax software to automate the entire tax reporting process. 

Once you know how much you do or do not truly owe in taxes, you will be equipped to respond to the CP2000 notice. It’s very possible that the amount the IRS is claiming that you owe is incorrect.

We recommend connecting with a cryptocurrency tax professional with further questions on how to appropriately respond to CP2000 as situations can vary from person to person.‍

The Crypto Tax Reporting Challenge

Because cryptocurrency data is often scattered across many different exchanges, wallets, and other platforms, it can be difficult for users to report all of their activity on Form 8949.

Most trades are quoted in other cryptocurrencies and not U.S. Dollar values which adds to this problem. To top it off, cryptocurrency exchanges are unable to provide their users with accurate tax reports due to the transferable nature of digital currencies. 

You can read more about why exchanges can’t give users accurate tax reports in our article: The Cryptocurrency Tax Problem.
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