Davit Cho Crypto Tax Specialist · CEO at LegalMoneyTalk · Contact: davitchh@proton.me

Bybit Hack 1-Year Later: Can You Finally Deduct Your Stolen Crypto? (2026 Tax Guide)

$1.5B stolen. 1 year later. OBBBA changed the rules. Here's exactly how to deduct stolen crypto on your 2026 return — and what the IRS won't tell you.

A year ago today — February 21, 2025 — North Korea's Lazarus Group executed the largest cryptocurrency heist in history. In a single afternoon, approximately $1.5 billion in Ethereum vanished from Bybit's cold storage wallets. By the time Bybit CEO Ben Zhou confirmed the breach on X, the stolen ETH was already being laundered through mixers and peer-to-peer vendors across three continents.

Last week, a client walked into my office with a Bybit account statement, a police report, and a question I have heard from dozens of investors over the past twelve months: "I lost everything. Can I at least get a tax deduction?"

The answer in 2025 was complicated. The answer in 2026 is still complicated — but for different reasons. On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA), which permanently changed the rules for casualty and theft loss deductions. Some doors that were about to reopen under the TCJA sunset slammed shut again. But one critical door stayed wide open — and most crypto investors do not know it exists.

This guide breaks down exactly what changed, who qualifies for a deduction, which IRS form to use, and the evidence you need to survive an audit. Whether you lost crypto in the Bybit hack, a DeFi exploit, a rug pull, or a phishing attack, the framework is the same.

Table of Contents

1. Quick Facts: Bybit Hack by the Numbers
2. What OBBBA Changed — and What It Didn't
3. 3 Deduction Paths for Stolen or Worthless Crypto
4. Bybit Victims: Your 6-Step Tax Action Plan
5. IRS CCM 202511015: What the IRS Actually Said
6. Evidence Checklist: 7 Documents You Must Have
7. What You Cannot Deduct (Don't Make These Mistakes)
8. Software Comparison: Theft & Loss Tracking
9. FAQ
10. Related Guides

Quick Facts: Bybit Hack by the Numbers

Bybit Hack — February 21, 2025

Metric	Detail
Amount Stolen	≈ $1.5 billion in ETH (Elliptic)
Attacker	Lazarus Group (North Korea) — confirmed by FBI
Recovery Status	88.87% traceable; ≈ 28% "gone dark" via mixers (CoinDesk)
Exchange Response	Reserves replenished within 72 hours via emergency loans + whale deposits (CNBC)
2025 Total Crypto Theft	$3.4 billion — Bybit alone was 44% of total (Chainalysis)
Relevant Tax Law	IRC §165(c)(2), Form 4684 Section B, OBBBA §165(h)
IRS Guidance	CCM 202511015 (March 2025)

What OBBBA Changed — and What It Didn't

To understand who can deduct stolen crypto in 2026, you need to understand the legal timeline. From 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) restricted personal casualty and theft loss deductions to losses arising from federally declared disasters only. Crypto theft did not qualify — period. Many investors expected this restriction to expire on December 31, 2025, reopening the door for all theft losses.

That did not happen. The One Big Beautiful Bill Act, signed into law on July 4, 2025, made the personal casualty and theft loss limitation permanent. Starting with tax years beginning after December 31, 2025, personal casualty losses are deductible only if they result from a federally or state-declared disaster. OBBBA expanded the definition to include state-declared disasters, but the core restriction remains.

Here is the critical exception that most articles miss: theft losses from transactions entered into for profit were never restricted by the TCJA or OBBBA. They remain fully deductible under IRC §165(c)(2). If you bought cryptocurrency as an investment — which covers the vast majority of retail holders — your theft loss is deductible regardless of whether a disaster was declared. The 2025 Form 4684 instructions explicitly confirm this: "Theft losses incurred in a transaction entered into for profit may still be deductible."

Key takeaway: OBBBA permanently killed the personal theft loss deduction (romance scams, personal phishing, lost items). But investment theft losses survived. If you held crypto to make money, the deduction lives.

Loss Type	2018–2025 (TCJA)	2026+ (OBBBA)	Deductible?
Personal theft (romance scam, personal phishing)	Non-deductible (unless federal disaster)	Non-deductible (unless federal/state disaster)	NO
Profit-motivated theft (exchange hack, investment scam)	Deductible under §165(c)(2)	Deductible under §165(c)(2)	YES
Business theft (trade or business)	Deductible under §165(c)(1)	Deductible under §165(c)(1)	YES
Worthless/abandoned crypto (investment)	Miscellaneous itemized — suspended	Abandonment via Form 4797 if proven worthless	YES (if proven)

3 Deduction Paths for Stolen or Worthless Crypto

Not all crypto losses follow the same tax path. The IRS treats stolen crypto, sold-at-a-loss crypto, and worthless crypto under three entirely different code sections with different forms, different caps, and different outcomes. Choosing the wrong path means either leaving money on the table or triggering an audit.

Path 1: Theft Loss — Form 4684, Section B

This is the primary path for Bybit hack victims, exchange hack victims, and investors who lost crypto to fraud schemes where a profit motive existed. Under IRC §165(c)(2), your theft loss deduction equals your adjusted cost basis in the stolen assets minus any reimbursement received or expected. The loss is classified as an ordinary loss — not a capital loss — which means there is no $3,000 annual cap against ordinary income. If you lost $50,000 in cost basis, you deduct $50,000 in the year of discovery (the year you determine no recovery is possible).

You report the loss on Form 4684, Section B (Business and Income-Producing Property), Part I. The deductible amount flows to Schedule A, line 16 as "Other itemized deductions." This means you must itemize your deductions to benefit — if the standard deduction exceeds your total itemized deductions, the theft loss effectively provides no tax benefit.

Path 2: Capital Loss — Form 8949 + Schedule D

If you still have access to your crypto but it has crashed in value, you cannot claim a theft loss. Instead, you must actually sell or exchange the asset to generate a capital loss. This is the standard tax-loss harvesting path that applies to market downturns like the current Bitcoin decline below $67,000. You sell the depreciated crypto, report the loss on Form 8949, and the totals flow to Schedule D. Capital losses offset capital gains dollar-for-dollar, with up to $3,000 per year deductible against ordinary income. Unused losses carry forward indefinitely.

This path is also available for stolen crypto if you want to avoid the complexity of the theft loss path. For example, if a small amount of crypto was stolen and the itemization requirement of Form 4684 does not benefit you, you could instead sell a negligible claim or token for $0 on an exchange that still supports it, and report the result as a capital loss on Form 8949. However, this converts what would be an unlimited ordinary loss into a capped capital loss — so the math only favors this approach for small amounts.

Path 3: Abandonment — Form 4797, Line 10

This path applies to crypto that is completely worthless — rug-pulled tokens, coins on abandoned blockchains, or assets permanently locked in wallets with lost private keys. Under Reg. 1.165-2, you can claim an abandonment loss if all four conditions are met: you invested with profit motive, the crypto lost its value, it is non-depreciable property, and you permanently discarded it (such as sending tokens to a burn address). The loss is reported on Form 4797, line 10 as an ordinary loss — no $3,000 cap.

The critical requirement is complete worthlessness. If the token still trades on any exchange — even at $0.0001 — it is not worthless in the eyes of the IRS. You must document that zero market value exists and that you took an affirmative act of abandonment.

Factor	Theft Loss (4684)	Capital Loss (8949)	Abandonment (4797)
Trigger	Criminal taking of property	Sale or exchange at a loss	Complete worthlessness + affirmative discard
Loss Type	Ordinary	Capital	Ordinary
Annual Cap vs. Ordinary Income	None	$3,000	None
Deduction =	Adjusted basis − recovery	Proceeds − adjusted basis	Adjusted basis (full)
Requires Itemization?	Yes (Sch. A)	No (Sch. D)	No (Form 4797 → Sch. 1)
Requires Proof of Crime?	Yes	No	No
Requires Proof of Worthlessness?	No	No	Yes
Best For	Exchange hacks, scams	Market losses, small thefts	Rug pulls, lost keys, dead chains

Bybit Victims: Your 6-Step Tax Action Plan

If you had assets on Bybit at the time of the February 21, 2025 hack, this section applies directly to you. Even if Bybit replenished its reserves and your account balance was restored, the tax treatment depends on what actually happened to your specific holdings.

Determine your actual loss status. Bybit moved quickly — within 72 hours, the exchange replenished reserves through emergency loans, whale deposits, and bridge purchases. If your account was restored to its pre-hack balance, you have no theft loss to claim. The reimbursement offsets the loss entirely. However, if you withdrew funds during the chaos at a lower value, or if your specific tokens were among the 28% that went dark and were never recovered, you may have a deductible loss. Check your Bybit account history and export the transaction record for the period of February 21–28, 2025.

Establish your cost basis. Your theft loss deduction is limited to your adjusted cost basis — not the market value at the time of theft. If you bought 10 ETH at $2,500 each (basis = $25,000) and it was worth $35,000 when stolen, your deduction is $25,000. You cannot deduct the $10,000 in unrealized appreciation. Gather original purchase confirmations from whichever exchange you first bought the ETH on, bank statements showing fiat deposits, and any transfer records between wallets. If the ETH moved through multiple platforms before reaching Bybit, trace the chain.

File a police report and FBI IC3 complaint. Even though the FBI already attributed the hack to North Korea's Lazarus Group (IC3 PSA, Feb 26 2025), you should have your own individual report on file. Go to ic3.gov and submit a complaint referencing the Bybit hack. Save the confirmation number and any response letters. This documentation is critical if the IRS challenges your theft loss claim.

Document that recovery is unlikely. IRC §165(e) requires that you claim the theft loss in the year of discovery — but only when there is no reasonable prospect of recovery. Given that 28% of stolen funds have "gone dark" through Bitcoin mixers and that North Korean state actors are the perpetrators, the prospect of individual recovery is effectively zero for most retail users. Save news articles, Chainalysis reports, and Bybit's own communications about the recovery status. The stronger your documentation that recovery is impossible, the more defensible your deduction.

Complete Form 4684, Section B. On line 19, describe the property as "Ethereum (ETH) held on Bybit exchange" with the acquisition date and date of discovery (February 21, 2025). On line 20, enter your adjusted cost basis. On line 21, enter any insurance or reimbursement received (e.g., if Bybit restored your balance, enter the full amount here — which would zero out your loss). On line 22, calculate the loss. Carry the total to Part II, then to Schedule A, line 16. Download the form at IRS.gov.

Decide whether itemizing benefits you. The theft loss deduction only works if you itemize. In 2025, the standard deduction is $15,000 for single filers and $30,000 for married filing jointly. If your theft loss plus other itemized deductions (state taxes, mortgage interest, charitable contributions) exceeds your standard deduction, itemize. If not, the theft loss provides no tax benefit through Form 4684. In that case, consider the capital loss path if you can sell a related token or claim on a secondary market.

IRS CCM 202511015: What the IRS Actually Said

In March 2025, the IRS Office of Chief Counsel issued Chief Counsel Advice Memorandum 202511015, analyzing five fact patterns involving crypto theft and scam losses. While Chief Counsel Advice is not binding legal authority (unlike Revenue Rulings or Treasury Regulations), it signals the IRS's likely audit position and is the closest thing to official guidance we have for crypto theft losses.

What qualified as deductible theft loss:

Three of the five fact patterns involved "pig butchering" investment scams — schemes where the taxpayer believed they were investing in a legitimate cryptocurrency platform promising returns. The IRS concluded these qualified as theft losses under IRC §165(c)(2) because all three conditions were met: the scammers committed criminal fraud under state law, the taxpayers transferred funds with profit motive (not personal reasons), and the losses were fixed with no reasonable prospect of recovery. This is directly analogous to exchange hack losses where an investor held crypto for investment returns.

What did NOT qualify:

Two patterns involved personal scams — a romance scheme and a kidnapping extortion scheme. The IRS ruled these did not qualify under the profit-motivated exception because the taxpayers were not engaged in profit-seeking activity when they sent the funds. Under OBBBA, these personal theft losses remain permanently non-deductible (unless connected to a declared disaster, which a scam is not).

What this means for Bybit victims:

If you held crypto on Bybit as an investment — which covers virtually all retail users on the platform — your loss falls squarely into the deductible category confirmed by CCM 202511015. The Lazarus Group committed criminal fraud, you held the assets for profit, and recovery prospects are minimal. The memo reinforces that the profit-motive exception under §165(c)(2) remains fully intact under OBBBA.

Evidence Checklist: 7 Documents You Must Have

The burden of proof lies entirely with the taxpayer. Without contemporaneous documentation, the IRS will deny your theft loss claim at examination. For the Bybit hack specifically, here is the minimum evidence you need:

#	Document	Why It Matters	Where to Get It
1	Police report or FBI IC3 filing	Proves criminal activity occurred under state/federal law	ic3.gov + local police
2	Blockchain transaction hashes	Proves your specific assets were transferred without authorization	Etherscan — search your wallet address
3	Exchange correspondence & freezing notices	Confirms the exchange acknowledged the breach and your affected status	Bybit support emails, in-app notifications, official announcements
4	Original purchase records (cost basis)	Establishes the deductible amount — IRS assumes $0 basis if you can't prove it	Purchase exchange (Coinbase, Kraken, etc.), bank statements, transfer records
5	Communication logs with platform	Documents your recovery attempts and the platform's response	Email, chat transcripts, support ticket history
6	Legal opinion letter (if loss > $100K)	Provides professional analysis that your claim qualifies under §165(c)(2)	Crypto-experienced tax attorney
7	Form 4684 Section B (completed)	The actual IRS form reporting the loss	IRS.gov Form 4684

Retention period: Keep all documentation for at least 7 years from the filing date. For theft losses, the IRS statute of limitations can extend to 6 years if they suspect a substantial understatement (more than 25% of gross income).

What You Cannot Deduct (Don't Make These Mistakes)

Understanding what is not deductible is as important as knowing what is. Filing an improper deduction for crypto losses does not just result in a denied claim — it can trigger penalties up to 75% of the underpayment if the IRS classifies it as fraud. Here are the most common mistakes:

Mistake 1: Deducting unrealized losses on crypto you still hold

If your portfolio dropped from $100,000 to $20,000 but you did not sell, you have no deductible loss. The IRS requires a realization event — a sale, exchange, abandonment, or theft. Holding a depreciated asset is not a tax event. You must sell to generate a capital loss or prove worthlessness for an abandonment loss.

Mistake 2: Claiming personal theft losses in 2026

If you sent crypto to a romance scammer, fell for a fake giveaway, or were phished while holding tokens for personal use (not investment), the loss is permanently non-deductible under OBBBA's §165(h) unless connected to a declared disaster. No amount of documentation changes this — the law requires profit motive.

Mistake 3: Double-dipping on reimbursed losses

If Bybit restored your account balance after the hack, your loss has been reimbursed. You cannot claim a theft loss for assets that were replaced. The deduction is reduced dollar-for-dollar by any reimbursement received or reasonably expected. If you deduct the loss and later receive reimbursement, you must include the recovery in income in the year received.

Mistake 4: Claiming worthlessness too early

With abandonment losses returning for crypto, some investors rush to claim tokens as worthless when they still trade — even at fractions of a cent. The IRS strictly interprets "worthless" as zero residual market value. If even one exchange lists the token with a bid price, it is not worthless. Wait until no market exists, or sell the token for $0.01 and take the capital loss instead.

Mistake 5: Using the Ponzi safe harbor for exchange hacks

Rev. Proc. 2009-20 provides a streamlined deduction method for Ponzi scheme victims, but it requires the scheme's operator to be formally charged by indictment. The Bybit hack was a state-sponsored cyberattack, not a Ponzi scheme. Using the wrong safe harbor will result in a rejected filing. Use the standard theft loss rules under §165(c)(2) instead.

Software Comparison: Theft & Loss Tracking

Tracking stolen or worthless crypto for tax purposes requires software that can handle non-standard dispositions — not just sales and trades. Here is how the major crypto tax platforms compare for theft and loss scenarios, which is particularly relevant for Bybit hack victims needing to generate Form 4684 or classify assets as stolen within their portfolio tracking:

Feature	CoinLedger	Koinly	CoinTracker
Mark asset as "Stolen"	Yes — manual tag	Yes — "Lost/Stolen" label	Yes — custom classification
Mark asset as "Lost" (keys)	Yes	Yes	Yes
Mark asset as "Worthless"	Manual (set proceeds to $0)	Yes — send to null address	Manual (edit proceeds to $0)
Auto-generates Form 4684	No — manual filing	No — manual filing	No — manual filing
Generates Form 8949	Yes	Yes	Yes
Bybit integration	Yes (API + CSV)	Yes (API + CSV)	Yes (API + CSV)
Cost basis tracking across exchanges	Yes — universal, per-wallet, specific ID	Yes — FIFO, LIFO, HIFO, ACB	Yes — FIFO, LIFO, HIFO, spec ID
Pricing (basic tier)	From $49/year	From $49/year	From $59/year

Important: No crypto tax software currently auto-generates IRS Form 4684. You must complete Section B manually or through your CPA. The software helps by isolating stolen transactions, preserving cost basis records, and exporting supporting documentation. For a full comparison of crypto tax tools, see our Best Crypto Tax Software guide.

Frequently Asked Questions

Can I deduct crypto stolen in the Bybit hack on my 2025 tax return?

Yes — if you held the crypto as an investment (profit-motivated transaction), you can claim a theft loss deduction under IRC §165(c)(2). Report it on Form 4684, Section B. The deduction equals your adjusted cost basis minus any recovery received or expected. The loss is claimed in the tax year you discovered the theft (2025 for most Bybit victims) — provided no reasonable prospect of recovery exists at the time of filing.

Did OBBBA kill the theft loss deduction for stolen crypto?

Not entirely. The One Big Beautiful Bill Act permanently limits personal casualty and theft losses to federally or state-declared disasters. However, theft losses from profit-motivated transactions — which includes crypto held as an investment — remain fully deductible under IRC §165(c)(2). The key is proving your profit motive, which is straightforward for exchange-based crypto holdings.

What forms do I file to deduct stolen cryptocurrency?

Use Form 4684, Section B (Casualties and Thefts — Business and Income-Producing Property). The deductible amount flows to Schedule A, line 16 as "Other itemized deductions." You must itemize to benefit. If you prefer the capital loss route (for smaller amounts), sell the claim or token and report on Form 8949 + Schedule D.

When do I claim the theft loss — the year it happened or the year I discovered it?

Under IRC §165(e), you claim the theft loss in the year of discovery, not the year it occurred — but only if there is no reasonable prospect of recovery at that time. For most Bybit victims, the discovery year is 2025 (the hack was discovered on February 21, 2025). If you are still waiting for potential recovery, you may need to defer the deduction until the year recovery becomes clearly impossible.

Can I deduct unrealized gains on stolen crypto?

No. Your theft loss deduction is limited to your adjusted cost basis in the stolen assets. If you bought 10 ETH at $2,500 each ($25,000 basis) and it was worth $35,000 when stolen, your deduction is $25,000 — not $35,000. You cannot deduct unrealized appreciation.

Is lost-key crypto deductible in 2026?

Potentially, but not as a theft loss (no crime occurred). If the crypto is completely worthless and permanently inaccessible, you may claim an abandonment loss on Form 4797, line 10. You must prove: profit motive, complete worthlessness, and an affirmative act of abandonment (like sending remaining tokens to a burn address). Documentation of recovery attempts is critical.

What evidence does the IRS require for a crypto theft loss?

At minimum: police report or FBI IC3 filing, blockchain transaction hashes showing the unauthorized transfer, exchange correspondence confirming the breach, original purchase records proving cost basis, and documentation that recovery is unlikely. For losses exceeding $100,000, a legal opinion letter from a crypto-experienced tax attorney is strongly recommended.

Does Bybit report to the IRS?

Bybit is a Dubai-based exchange and does not issue IRS Form 1099-DA to U.S. users. However, U.S. taxpayers are required to self-report all cryptocurrency transactions — including losses — on their federal tax returns regardless of whether an information return was issued. The obligation to report exists independently of the exchange's reporting.

Can I use the Ponzi scheme safe harbor for Bybit hack losses?

Unlikely. Rev. Proc. 2009-20 requires the scheme's lead figure to be charged by indictment or information under state or federal law. The Bybit hack was a state-sponsored cyberattack by North Korea's Lazarus Group — not a fraudulent investment scheme with an identifiable operator. Standard theft loss rules under §165(c)(2) are the correct path.

What is the maximum I can deduct for stolen crypto?

For profit-motivated theft losses reported on Form 4684 Section B, there is no annual cap — the full adjusted basis is deductible as an ordinary loss in the year of discovery. This is fundamentally different from capital losses, which are capped at $3,000 per year against ordinary income. For a theft loss of $500,000 in cost basis, you deduct the full $500,000 as an ordinary loss (subject to itemization requirements).

Related Guides

50% of Crypto Holders Fear IRS Penalties — 2026 Survey Best Crypto Tax Software — Full Comparison IRS Form 8949 for Crypto: Complete Filing Guide Crypto Tax-Loss Harvesting: The Definitive Strategy Per-Wallet Cost Basis Tracking After Rev. Proc. 2024-28 Got an IRS CP2000 Notice for Crypto? Here's What to Do OECD CARF: Global Crypto Reporting Framework Explained

Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax laws change frequently; consult a qualified CPA or tax attorney for advice specific to your situation. LegalMoneyTalk is not affiliated with the IRS, Bybit, or any crypto exchange mentioned. Sources include IRS.gov official documents, CNBC, Chainalysis, Elliptic, FBI IC3, CoinDesk, Taxpayer Advocate Service, and CoinTracker. All data is accurate as of the publication date (February 22, 2026) and may change.

50% of Crypto Holders Fear IRS Penalties — And They're Right to Be Scared (2026 Survey)

Davit Cho

Crypto Tax Specialist & Financial Analyst | CEO, JejuPanaTek
Published: February 20, 2026 · Updated with live market data
Contact: davitchh@proton.me

On February 18, 2026, CoinDesk published the results of an Awaken Tax survey that should alarm every American crypto investor: 53% of 1,000 U.S. crypto holders fear they will face IRS penalties this filing season. Two days later, MarketWatch confirmed that crypto investors who don't fill out the new 1099-DA form correctly will overpay their taxes — potentially by thousands of dollars.

After spending weeks analyzing the new Form 1099-DA system, the per-wallet cost basis rules, the IRS's automated matching infrastructure, and dozens of real-world cases from Reddit and CPA forums, I can say this clearly: the 53% who are scared are right. And the 47% who aren't scared should be.

Bitcoin is trading at $67,800 today (Feb 20, 2026), down 38% from its all-time high of $109,000. The crypto market is bleeding. Many investors are sitting on unrealized losses — but their 1099-DA forms tell a completely different story, one where the IRS sees 100% of their sale proceeds as pure taxable profit.

This guide breaks down every number from the Awaken Tax survey, explains exactly why the fear is justified with real dollar examples, maps the full IRS penalty structure, and gives you a step-by-step fix before the April 15, 2026 filing deadline.

⚡ Quick Facts — 2026 Crypto Tax Crisis

• 53% of US crypto investors fear IRS penalties (Awaken Tax survey, Jan 2026)
• 61% confused about how new rules apply to their situation
• 48% uncertain about cost basis for past transactions
• 72% plan to use professional tax help this year
• <20% of crypto holders currently file correctly
• 1099-DA reports gross proceeds only — cost basis often $0
• Form 8949 + Schedule D required for accurate filing
• IRS penalty for failure to report: up to $100,000 fine + prison
• Negligence penalty: 20% of underpayment | Civil fraud: 75%
• April 15, 2026: Filing deadline (Oct 15 with extension)
• $28 billion: Estimated 10-year revenue from 1099-DA reporting
• BTC today: $67,800 (down 38% from $109K ATH)

⚠️ 1099-DA broker deadline was Feb 17, 2026. If you received yours and it shows $0 basis — do NOT file without correcting it first.

📋 Table of Contents

1. The Awaken Tax Survey: What 1,000 Investors Said
2. Why They're Right to Be Scared — The Math
3. The 1099-DA Problem: Why Exchanges Can't Send the Right Info
4. IRS Penalty Breakdown: From 20% to 75% to Prison
5. The Per-Wallet Trap: Same BTC, Different Tax
6. The IRS Machine: CP2000 + AI + 129 Use Cases
7. Enforcement Timeline: How We Got Here
8. 7-Step Fix Before April 15
9. Software That Actually Fixes the $0 Basis
10. FAQ (10 Questions)
11. Related Guides

1. The Awaken Tax Survey: What 1,000 Crypto Investors Said

In late January 2026, crypto tax platform Awaken Tax surveyed 1,000 U.S. digital asset investors about the new IRS reporting regime. The results, first reported by CoinDesk on February 18, 2026 and subsequently covered by KuCoin, Phemex, Bitget, and CryptoRank/BitcoinWorld, paint a devastating picture of an investor class that is overwhelmingly confused, under-prepared, and rightfully anxious.

Survey Metric	Result	What It Means
Fear IRS penalties this tax season	53%	More than half expect to be penalized under the new system
Confused about how rules apply	61%	Majority don't understand how 1099-DA works
Uncertain about cost basis for old transactions	48%	Nearly half can't prove what they originally paid
Plan to use professional tax help	72%	Most recognize they can't navigate this alone
Currently file crypto taxes correctly	<20%	Vast majority are non-compliant right now

Fear IRS Penalties

53%

Confused About Rules

61%

Unsure About Cost Basis

48%

File Correctly

<20%

The timing of this survey is critical. The IRS opened the 2026 filing season on January 26, 2026. Exchanges were required to send Form 1099-DA to both investors and the IRS by February 17, 2026. This means the IRS now has — for the first time in history — a direct, standardized data pipeline showing exactly how much every centralized exchange user received in crypto sale proceeds.

As Awaken Tax founder Andrew Duca told CoinDesk:

"It means crypto is being treated like stocks, but it doesn't behave in that way. Real crypto users will move assets between multiple wallets and interact with decentralized finance (DeFi) protocols, using pretty complex trading strategies."

The compliance rate — under 20% — is the number that explains why the IRS built this system in the first place. According to Duca, the IRS wants to push that number to 80% within a year. The 1099-DA is what he calls a "blunt instrument" designed to force compliance through fear and automated matching.

Lawrence Zlatkin, Vice President of Tax at Coinbase, confirmed the danger in the MarketWatch report:

"There is no game of chance here; the system is designed to flag these data gaps and shift the burden of proof onto the taxpayer."

2. Why They're Right to Be Scared — The Math

The fear isn't emotional. It's mathematical. When your 1099-DA shows gross proceeds but $0 cost basis, the IRS's Automated Underreporter (AUR) system doesn't guess — it assumes 100% of proceeds are taxable gain. This means an investor who actually lost money on a trade could receive a tax bill showing they owe thousands.

Example: Selling 1 BTC for $66,000

Scenario	Proceeds	Cost Basis	Gain/Loss	Tax @ 24%
1099-DA as-is ($0 basis)	$66,000	$0	$66,000 gain	$15,840
FIFO (bought 2021 @ $35K)	$66,000	$35,000	$31,000 gain	$7,440
Specific ID (bought 2024 @ $97K)	$66,000	$97,000	-$31,000 loss	$0 + deduction

Same person. Same Bitcoin. Same sale. The difference between filing with $0 basis and filing with Specific Identification is $15,840. That's not a rounding error — it's a mortgage payment that you're volunteering to send to the IRS for no reason.

Coinbase VP Lawrence Zlatkin described the mechanism to MarketWatch: when IRS computers sync the 1099-DA forms with tax returns, their default is marking $0 for any missing cost basis. The system doesn't ask questions. It doesn't give you the benefit of the doubt. It just calculates max tax and sends the bill.

⚠️ The "Cost Basis Trap" is the #1 reason crypto investors overpay taxes in 2026. If you import your 1099-DA directly into TurboTax, H&R Block, or any tax software without manually correcting the cost basis, you are volunteering to pay tax on money you never made. The IRS will happily accept the overpayment — and they will not send it back automatically.

How big is this problem nationally?

The Bipartisan Infrastructure Law of 2021 created the 1099-DA reporting requirement with a Joint Committee on Taxation estimate of approximately $28 billion in additional revenue over 10 years. That revenue comes from somewhere — and a significant portion comes from investors who fail to report correct cost basis and end up overpaying.

As Accounting Today reported on February 16, 2026, tax attorney David W. Klasing of The Tax Law Offices warns: "When you cannot substantiate basis, the IRS may treat your basis as zero, which can effectively treat the full proceeds as taxable gain. The IRS can also broaden the audit, and, in the wrong fact pattern, frame the issue as deliberate concealment rather than poor recordkeeping."

3. The 1099-DA Problem: Why Exchanges Can't Send the Right Information

Form 1099-DA is the IRS's new standardized reporting pipeline for digital asset broker transactions, effective for the 2025 tax year. It's the crypto equivalent of the 1099-B that stock brokers have sent for decades. But the crypto version has a fundamental structural flaw that makes it far more dangerous than its stock market counterpart.

Andrew Duca of Awaken Tax explained the core issue to CoinDesk:

"Coinbase actually cannot send the right information, because you can imagine if someone has bitcoin in a cold storage wallet ledger, they send it to Coinbase to sell. Coinbase doesn't know your acquisition price, what you bought it for. So Coinbase is sending incorrect forms to the IRS. The 1099-DA form reports proceeds, but it doesn't report tax basis."

David Zareh, partner and co-founder of OnChain Accounting (quoted in the MarketWatch report), added: "Typically, people have tons and tons of sources. The challenge for investors is the fragmentation of transactions as the asset darts around different exchanges and wallets. Along the way, exchanges may have closed and people may have forgotten about digital wallets or keys to those wallets. Scams may have happened too. It leaves many with a broken trail."

What Form 1099-DA Reports vs. What It Doesn't

What 1099-DA Reports (2025 Tax Year)	What 1099-DA Does NOT Report
Date of each transaction	Cost basis for transferred-in assets
Gross proceeds (sale amount in USD)	Original purchase price from another exchange
Asset type (BTC, ETH, SOL, etc.)	DeFi/DEX transaction history
Number of units sold	Wallet-to-wallet transfer records
Broker's name and TIN	Staking, mining, or airdrop acquisition costs
Transaction ID (if available)	NFT sales under $600
	Stablecoin sales under $10,000 aggregate
	Wrapping/unwrapping (ETH→WETH)

For the 2025 tax year, brokers report only gross proceeds. Cost basis reporting for covered transactions begins January 1, 2026 — meaning there's an entire year of transactions where the IRS receives sale prices but not purchase prices. The gap is structural, not accidental. The phased approach, according to Coinbase's Zlatkin, reflects the massive technical challenge: "It's really challenging to do this for billions of transactions. It's going to be a test year."

The IRS provided penalty relief for brokers under Notice 2024-56 for good-faith compliance efforts. But that relief does not extend to taxpayers. You are still required to report correct cost basis on Form 8949 regardless of what your 1099-DA shows.

✅ IRS Notice 2025-7 explicitly allows you to report your own cost basis and use Specific Identification (including HIFO — Highest In, First Out) to minimize taxes, even when the 1099-DA shows $0. The key requirement: maintain adequate records documenting the lots you selected. Read Notice 2025-7 →

Even next year won't fully solve the problem. As CoinTracker's Shehan Chandrasekera told MarketWatch, when the 2026 1099-DAs arrive in 2027, exchanges will only have to provide cost basis for transactions that both originate and finish on the same exchange. If crypto moves between platforms, the receiving exchange still won't report basis. The onus on the taxpayer isn't going away.

4. IRS Penalty Breakdown: From 20% to 75% to Prison

The survey found 53% of investors fear penalties. Here's exactly what those penalties look like, based on the Internal Revenue Code, IRS guidance, and recent enforcement precedent:

Civil Penalty Structure

Violation	Penalty	IRC Section	Trigger
Failure to file tax return	5% per month of unpaid tax (max 25%)	§6651(a)(1)	Not filing by April 15 or Oct 15 with extension
Failure to pay tax owed	0.5% per month (max 25%)	§6651(a)(2)	Not paying by April 15 even with extension
Accuracy-related (negligence)	20% of underpayment	§6662	Careless errors, missing records, wrong basis
Substantial understatement	20% of underpayment	§6662(d)	Understatement exceeds greater of $5K or 10%
Civil fraud penalty	75% of underpayment	§6663	Deliberate concealment, fabricated docs
Backup withholding	24% of gross proceeds	§3406	Missing or incorrect TIN on exchange account

Criminal Penalty Structure

Violation	Fine	Prison	IRC Section
Tax evasion	Up to $100,000 ($500K for corps)	Up to 5 years	§7201
Willful failure to file	Up to $25,000	Up to 1 year	§7203
Filing false return	Up to $100,000	Up to 3 years	§7206

The critical distinction between negligence (20%) and fraud (75%) comes down to intent. As tax attorney David Klasing explained in Accounting Today: a cost basis gap from lost records may indicate negligence. But if that gap coincides with fabricated documents, deliberate wallet obfuscation, false statements to examiners, or false answers to the digital asset question on Form 1040 — it can support a finding of fraud.

⚠️ The digital asset question on Form 1040 is now a trip wire. The IRS asks every taxpayer: "At any time during 2025, did you receive, sell, send, exchange, or otherwise acquire any digital assets?" Answering "No" when the IRS holds your 1099-DA showing crypto sales creates an automatic discrepancy. According to Klasing, "An incorrect answer can increase risk if the IRS later substantiates transactions through information reporting. A false answer increases risk if the IRS proves dispositions using broker reports." This can escalate a simple CP2000 notice into a fraud investigation.

California residents face additional exposure: California taxes capital gains at ordinary income rates (up to 13.3%), not the preferential federal rates. California can also pursue criminal tax investigations through its own enforcement apparatus. If you have multi-year crypto reporting problems and live in California, you're facing parallel federal and state liability.

One important nuance: the IRS announced it will not impose penalties on brokers for failure to file or furnish Forms 1099-DA for 2025 transactions, provided good-faith compliance efforts. This relief is for brokers only. Your personal obligation to report correctly is unchanged.

5. The Per-Wallet Trap: Same BTC, Different Tax

The survey revealed 48% of investors are uncertain about their cost basis. A major reason — one most respondents probably don't even realize — is the per-wallet cost basis rule that took effect January 1, 2025.

Under Revenue Procedure 2024-28, the IRS now requires each wallet and exchange to track cost basis separately. The "universal wallet" method — where you pooled all your crypto purchases across all platforms into one cost-basis pool — is permanently banned.

Before vs. After: How Cost Basis Tracking Changed

Feature	Before Jan 1, 2025	After Jan 1, 2025
Cost basis tracking	Universal pool across all wallets	Each wallet/exchange = separate tax account
Lot selection	Flexible across all platforms	FIFO default within each wallet unless Specific ID elected
Transfers between wallets	No basis allocation needed	Must allocate specific lots when transferring
Tax outcome	One calculation, one result	Multiple parallel calculations, different results per wallet
Safe harbor for reallocation	Available until Dec 31, 2024	Expired — no longer available

Real Example: Why This Matters

Imagine you hold 2 BTC total — 1 BTC bought at $97,000 on Coinbase and 1 BTC bought at $23,000 on Kraken. Today BTC is $67,800. You sell 1 BTC.

Sell From	FIFO Basis	Gain/Loss	Tax @ 24%
Coinbase (bought @ $97K)	$97,000	-$29,200 loss	$0 + deduction up to $3,000
Kraken (bought @ $23K)	$23,000	+$44,800 gain	$10,752

Same person. Same total BTC holding. Same sale price. $10,752 tax difference depending on which wallet they sell from. Under the old universal pool method, you could strategically select lots across platforms. Under per-wallet rules, FIFO applies within each wallet unless you explicitly elect Specific Identification — and many investors don't even know they have this option.

The safe harbor deadline for reallocating basis across wallets was December 31, 2024. It has passed. If you didn't reallocate before that date, you're locked into whatever allocation existed at year-end 2024.

✅ Deep dive with migration guide, software comparison, and step-by-step instructions: Per-Wallet Cost Basis 2026: The New IRS Rule That Changes Everything for Crypto Investors →

6. The IRS Machine: CP2000 + AI + 129 Use Cases

The IRS isn't just collecting 1099-DA forms and filing them in a cabinet. They're feeding them into an automated enforcement machine that has been significantly upgraded in 2025-2026.

The CP2000 Automated Matching System

The foundation is the Automated Underreporter (AUR) system. Here's how it works: exchanges submit 1099-DA forms to the IRS electronically. The AUR system compares the gross proceeds on every 1099-DA against what you report on Form 8949 and Schedule D. When there's a mismatch — even a small one — the system generates a CP2000 notice.

A CP2000 is not technically an audit. It's a "proposed adjustment" — a letter saying "the information we received doesn't match what you reported, and here's how much more we think you owe." According to IRS Topic 652, you have 30 days to respond (60 days if outside the U.S.). If you don't respond or can't prove your cost basis, the proposed adjustment becomes final, and the IRS adds the tax plus interest and penalties.

According to Koinly's CP2000 guide, the response form is typically on page 7 of the notice. You can agree, partially disagree, or fully disagree. If you disagree, you must include supporting documentation — which means your cost basis records, transaction history, and Form 8949 calculations.

AI-Powered Audit Selection: 129 Use Cases and Counting

Beyond CP2000, the IRS has dramatically expanded its use of artificial intelligence. According to a February 2026 analysis by Capitol Technology University, the IRS now operates 129 AI use cases, up from 54 in 2024 — a 139% increase in two years.

The AI infrastructure includes several key systems. The Discriminant Function (DIF) system scores returns for audit potential by analyzing discrepancies between income and deductions. The Individual Taxpayer Model recommends the top three issues likely needing adjustment on each return. The Large Partnership Compliance Model analyzes complex structures like hedge funds. These systems run six times per tax year, learning with each iteration.

Common AI triggers include year-over-year income discrepancies, extreme deduction ratios, round numbers suggesting estimates, underreported self-employment income, and — critically for crypto investors — mismatches between 1099-DA reported proceeds and Form 8949 reported amounts.

There's also a workforce context that matters. Between January and May 2025, the IRS cut its workforce by 25%, from 103,000 to 77,000 employees. The agency is compensating with technology. AI doesn't take lunch breaks, doesn't need training on crypto, and can cross-reference millions of 1099-DAs against tax returns simultaneously.

⚠️ Mismatch triggers are automatic and instantaneous. The IRS doesn't need a human auditor to flag your return. If your Form 8949 proceeds total doesn't match your 1099-DA proceeds total, the computer generates a CP2000 notice. With the first wave of 1099-DA forms now in the IRS system, the AUR will flag more crypto-related returns this year than in the entire previous history of crypto taxation combined.

The enforcement pipeline extends beyond domestic borders. IRS Commissioner Jay Bisignano has expanded international enforcement capabilities, and the CARF 2027 (Crypto-Asset Reporting Framework) will enable automated cross-border information sharing by 2027. We covered this in detail in our CARF 2027 + IRS Bisignano enforcement guide.

7. Enforcement Timeline: How We Got Here

The current crisis didn't appear overnight. It's the result of a decade-long regulatory escalation:

2014

IRS Notice 2014-21 declares virtual currency is "property" for tax purposes. Capital gains rules apply.

2019

IRS adds crypto question to Form 1040. Sends 10,000 warning letters to crypto holders. Rev. Rul. 2019-24 clarifies hard forks and airdrops are taxable income.

2021

Bipartisan Infrastructure Law creates broker reporting requirements (Section 6045). $28 billion estimated revenue over 10 years. Industry objects; Congress overrides.

July 2024

Treasury and IRS issue final regulations for Form 1099-DA reporting. Revenue Procedure 2024-28 mandates per-wallet cost basis tracking starting Jan 1, 2025.

Dec 31, 2024

Safe harbor deadline for reallocating cost basis across wallets expires. No extensions granted.

Jan 1, 2025

Per-wallet tracking begins. Universal wallet method banned. FIFO is default unless Specific ID elected. 1099-DA reporting applies to all 2025 transactions.

Jan 26, 2026

IRS opens 2026 filing season for 2025 tax returns.

Feb 17, 2026

Broker deadline: 1099-DA forms sent to IRS and taxpayers. First-ever standardized crypto reporting at scale.

Apr 15, 2026

Tax filing deadline. Extensions available to Oct 15 via Form 4868, but estimated tax due by Apr 15.

Jan 1, 2026 →

Cost basis reporting begins for covered assets (acquired and sold on same exchange). EU DAC8 enters force. OECD CARF first exchanges expected 2027.

8. 7-Step Fix Before April 15

The Awaken Tax survey found 72% of investors plan to use professional tax help this year. Whether you go pro or DIY, here's the complete action plan to avoid the $0 basis trap and IRS penalties:

Step 1: Collect Every 1099-DA From Every Exchange

Check every centralized exchange you used in 2025: Coinbase, Kraken, Gemini, Robinhood, Binance.US, Crypto.com, etc. Each one may send a separate 1099-DA. Log into each platform's tax documents section and download them. If you don't receive one, don't assume you're safe — the IRS likely received the exchange's copy already. Remember: exchanges were required to submit their copies to the IRS by February 17.

Step 2: Export Your Complete Transaction History — Every Platform, Every Wallet

For every exchange AND every wallet (hardware wallets like Ledger and Trezor, software wallets like MetaMask, Trust Wallet, Phantom), export your full transaction history as CSV. This includes purchases, sales, transfers in, transfers out, staking rewards, airdrops, DeFi interactions — everything. If an exchange has shut down, check your email for old transaction confirmation emails or use blockchain explorers (Etherscan, Blockchain.com, Solscan) to reconstruct your history from your public addresses.

Step 3: Reconcile Cost Basis Across All Sources

This is the critical step — and it's where most people fail. You need to match every sale reported on your 1099-DA(s) with the actual cost basis from your records. Pay special attention to "transferred-in" assets where the exchange shows $0 basis because it doesn't know your original purchase price. For each transaction, you need: date acquired, date sold, cost basis (what you paid + fees), proceeds (what you received), and gain or loss. Use crypto tax software to automate this (see Section 9) or work with a CPA who specializes in crypto.

Step 4: Choose Your Accounting Method — Don't Accept FIFO by Default

Under IRS Notice 2025-7, the default is FIFO (First In, First Out) — which in today's declining market often produces the worst possible tax outcome because it sells your cheapest (oldest) lots first, showing maximum gain. You have the right to use Specific Identification, including HIFO (Highest In, First Out), which typically minimizes tax by selling your most expensive lots first. In a market where BTC is down 38% from ATH, the difference between FIFO and HIFO can be tens of thousands of dollars. The only requirement: maintain adequate records documenting which lots you selected.

Step 5: Handle DeFi, Staking, and Unreported Transactions

The 1099-DA does not cover: DEX swaps (Uniswap, Jupiter, etc.), DeFi interactions (Aave, Compound, etc.), staking rewards (reported on 1099-MISC if over $600, not 1099-DA), mining income, airdrops, bridge transactions, liquidity pool activities, and NFT sales under $600. All of these are still taxable and must be self-reported. Staking and mining income is reported as ordinary income on Schedule 1 or Schedule C. Subsequent sales of those tokens create separate capital gains events on Form 8949.

Step 6: File Form 8949 + Schedule D With Correct Basis

Report all crypto dispositions on Form 8949. The box selection matters for IRS matching: use Box H (short-term) or Box K (long-term) for transactions reported on 1099-DA. Use Box I (short-term) or Box L (long-term) for DeFi, DEX, and other unreported transactions. If your 1099-DA shows $0 basis and you're reporting correct basis, use Column (f) adjustment codes to reconcile the difference. Totals flow to Schedule D.

Step 7: File or Extend — But Pay by April 15 Either Way

If you're ready, file by April 15, 2026. If you need more time, file Form 4868 for an automatic extension to October 15, 2026. But — and this is critical — an extension to file is NOT an extension to pay. Estimate what you owe and pay by April 15 to avoid failure-to-pay penalties (0.5% per month) and interest. Given the unprecedented complexity of this year's crypto reporting, many CPAs are recommending extensions for clients with significant crypto activity to allow time for proper basis reconciliation.

📅 Key Dates: Feb 17 (broker 1099-DA deadline ✅ passed) → April 15 (file or extend + pay) → Oct 15 (extended filing deadline)

9. Software That Actually Fixes the $0 Basis

The 72% of survey respondents planning to use professional help will likely end up using one of these tools — or their CPA will. We independently tested 8 platforms for the 2026 filing season, focusing specifically on three capabilities that matter most this year: 1099-DA import and reconciliation, per-wallet cost basis tracking, and Specific Identification (HIFO) support.

Platform	Price	1099-DA	Per-Wallet	HIFO	DeFi	Best For
CoinLedger	$49/yr	✅	✅	✅	✅	Best overall value
Koinly	$49/yr	✅	✅	✅	✅	International (100+ countries)
CoinTracker	$59/yr	✅	✅	✅	✅	Official TurboTax integration
Awaken Tax	$99/yr	✅	✅	✅	✅ Deep	DeFi power users
Summ	$49/yr	✅	✅	✅	✅	CPA collaboration
TaxBit	Free	✅	✅	Limited	Limited	Simple CEX-only users
TokenTax	$65/yr	✅	✅	✅	✅	Full-service ($3,499)
Bitcoin.Tax	$55/yr	⚠️	⚠️	✅	❌	Simple BTC-only

At minimum, any software you choose must be able to: import your 1099-DA and cross-reference it against your actual transaction history, track cost basis separately per wallet (per Rev. Proc. 2024-28), support Specific Identification to optimize your lot selection, and generate Form 8949 with the correct box codes (H/K for reported, I/L for unreported transactions).

✅ Full comparison with pricing tiers, feature checklist, and recommendations: Best Crypto Tax Software 2026: 8 Platforms Independently Compared →

10. Frequently Asked Questions

Is it true the IRS won't penalize me for 1099-DA errors?

Partially true — but misleading. The IRS announced penalty relief for brokers who make good-faith compliance efforts on 1099-DA filing for 2025 transactions under Notice 2024-56. This relief does NOT apply to taxpayers. You are still required to accurately report all crypto transactions on Form 8949 and Schedule D. If your 1099-DA shows $0 basis and you file it as-is without correcting the basis, you will overpay — and the IRS will not refund the overpayment automatically. You would need to file an amended return (Form 1040-X) to recover the excess tax.

What if I lost my records from an old exchange that shut down?

This is the 48% problem from the Awaken Tax survey. Steps to reconstruct: check your email for old trade confirmation emails from the exchange; check bank and credit card statements for purchase amounts and dates; use blockchain explorers (Etherscan, Blockchain.com, Solscan) to trace transactions from your wallet addresses; import wallet addresses into crypto tax software — they can often reconstruct the chain of custody. If you absolutely cannot find records, the IRS may treat your basis as $0. In that case, work with a crypto-specialized CPA to document your best reasonable estimate of basis with supporting evidence. As OnChain Accounting's David Zareh told MarketWatch: "Along the way, exchanges may have closed and people may have forgotten about digital wallets. It leaves many with a broken trail."

Can the IRS really see all my crypto transactions?

The IRS can now see all transactions on centralized exchanges through 1099-DA reporting. For DeFi and personal wallets, the IRS doesn't receive automatic reports yet — but it has blockchain analytics contracts with companies like Chainalysis, and the CARF 2027 framework will enable automated cross-border information sharing. The EU's DAC8 rules entered force January 1, 2026, with first reporting due September 2027. The OECD framework adds more jurisdictions by 2027. The direction is toward total visibility within 2-3 years.

What is the digital asset question on Form 1040 and why does it matter?

Every US taxpayer must answer: "At any time during 2025, did you receive, sell, send, exchange, or otherwise acquire any digital assets?" This question has been on Form 1040 since 2019. Answering "No" when the IRS holds a 1099-DA showing you sold crypto creates an immediate discrepancy. According to tax attorney David Klasing, a false answer to this question can be used as evidence of willfulness in a fraud investigation — upgrading your exposure from a 20% negligence penalty to a 75% civil fraud penalty or even criminal prosecution. Always answer truthfully.

Should I use FIFO or Specific Identification?

In the current market (BTC $67,800, down 38% from ATH), FIFO almost always produces the worst tax outcome because it sells your oldest (and typically cheapest) lots first, showing maximum gain. Specific Identification with HIFO (Highest In, First Out) typically minimizes tax by selling your most expensive lots first. Under IRS Notice 2025-7, the IRS explicitly allows Specific ID and HIFO as long as you maintain adequate records documenting your lot selection. We recommend it for most investors — the savings can be substantial. See our Tax-Loss Harvesting Mega Guide for detailed strategies on optimizing lot selection in a bear market.

What about staking, mining, and airdrop income?

Staking rewards, mining income, and airdrops are taxed as ordinary income at fair market value when received — not when sold. They are reported on Schedule 1 (or Schedule C if it's a business activity) and do NOT appear on Form 1099-DA (staking may appear on 1099-MISC if over $600). You must self-report these. When you later sell the staked, mined, or airdropped tokens, you have a separate capital gains event with cost basis equal to the fair market value you already reported as income. This creates a two-layer tax obligation that many investors miss. For staking-specific rules and the new SEC/CFTC regulatory framework, see our SEC + CFTC Project Crypto guide.

What if my 1099-DA proceeds don't match my crypto tax software totals?

This is common and expected in the first year. Exchanges may consolidate transactions, round amounts differently, include or exclude certain transaction types (like stablecoin-to-stablecoin trades under $10,000), or report dates based on settlement rather than trade execution. Use your crypto tax software totals as your accurate figure, and report the difference as an adjustment on Form 8949 using Column (f) adjustment codes. Include a clear note identifying which 1099-DA the adjustment relates to. The IRS expects discrepancies this year — what matters is that your total reported proceeds are accurate and you can support your calculations with records if asked.

Do I need to report crypto-to-crypto trades?

Yes. Every crypto-to-crypto trade (e.g., BTC to ETH, SOL to USDC) is a taxable event. The IRS treats it as a sale of the first asset at fair market value, triggering capital gains or losses. This applies to CEX trades, DEX swaps (Uniswap, Jupiter, PancakeSwap), cross-chain bridges, and wrapping/unwrapping in many cases. If the trade occurred on a centralized exchange, it may appear on your 1099-DA. If it occurred on a DEX or DeFi platform, you must self-report it on Form 8949 using Box I (short-term) or Box L (long-term). Some crypto tax software can auto-detect DEX swaps from your wallet address.

What is a CP2000 notice and how do I respond?

A CP2000 is the IRS's automated "proposed adjustment" letter, generated when information returns (like 1099-DA) don't match your tax return. It's not technically an audit — it's a notice saying "we think you owe more" based on a data mismatch. According to IRS guidance, you have 30 days to respond (60 days if outside the US). The response form is typically on page 7 of the notice. You can agree, partially disagree, or fully disagree. If you disagree, include supporting documentation: your cost basis calculations, transaction records, Form 8949 showing your reported amounts, and a brief explanation of why your numbers differ from the 1099-DA. If you agree with some items but not others, check "I partially agree" and itemize the specific adjustments. Do not ignore a CP2000 — if you don't respond, the proposed adjustment becomes final. If you receive one related to crypto, consult our 1099-DA Filing Guide for detailed Form 8949 instructions.

Should I file an extension?

If you're not ready by April 15, absolutely file Form 4868 for an automatic extension to October 15, 2026. It takes 5 minutes and buys you 6 months. But understand: an extension to file is NOT an extension to pay. Estimate what you owe and pay by April 15 to avoid the failure-to-pay penalty (0.5% per month, capped at 25%) and interest (currently ~8% annually). Given the unprecedented complexity of this year's crypto reporting — new 1099-DA forms, per-wallet basis rules, potential mismatches — many CPAs specializing in crypto are recommending extensions for clients with significant activity to allow time for proper basis reconciliation. Filing a wrong return is worse than filing a late-but-correct one.

11. Related Guides

1099-DA Filing Guide 2026Step-by-step: fix the $0 basis before you file Per-Wallet Cost Basis 2026The new IRS rule that changes everything Tax-Loss Harvesting Mega GuideTurn the BTC crash into thousands in savings Best Crypto Tax Software 20268 platforms independently tested and compared Coinbase Q4 $667M LossWhat it means for your crypto taxes and 1099-DA CARF 2027 + IRS BisignanoOffshore crypto enforcement playbook for expats SEC + CFTC Project Crypto 2026How single rulebook changes staking and DeFi taxes

Disclaimer: This article is for informational and educational purposes only and does not constitute tax, legal, or financial advice. Crypto tax rules are complex, jurisdiction-specific, and subject to change. Consult a qualified CPA or tax attorney for advice specific to your situation. Survey data cited from Awaken Tax as reported by CoinDesk (Feb 18, 2026) and MarketWatch (Feb 15, 2026). Market prices as of February 20, 2026. IRS penalty information sourced from the Internal Revenue Code and IRS.gov. LegalMoneyTalk is not affiliated with Awaken Tax, the IRS, Coinbase, or any crypto exchange or software platform mentioned. Sources linked throughout for independent verification.