I received Notice CP2000 from the IRS. They claimed I owed $40,000 in taxes on “unreported crypto transactions” from 2024. They were counting every transfer between my own wallets as a “sale.” I faced thousands in legal fees to prove I didn’t sell, I just moved it.
Key Takeaways
- The Burden of Proof is on You: The IRS assumes every withdrawal from an exchange is a taxable sale unless you prove otherwise. You need to link the transfers to your self-custody wallets.
- Audit Defense vs. Insurance: “Audit Defense” (like from TurboTax) pays for a professional to represent you. It does not pay the back taxes or penalties you owe.
- Professional Fees: A crypto-specialized CPA charges
300−300−500/hour. A complex audit can cost $10,000 in fees. - “Tax Shield” Policies: Some high-end tax software (CoinTracker/Koinly) offers “Audit Support” packages. This provides generated reports and limited CPA hours.
The “Why” (The Trap)
The trap is “Cost Basis Tracking.”
If the IRS sees a sale of 1 BTC for $60,000 but doesn’t see when you bought it, they assume your cost basis is $0. You are taxed on the full $60,000.
Standard “Legal Defense” insurance usually excludes “Tax Audits” unless it’s a specific rider.
The Investigation (I Reviewed Services)
I checked the major tax tools.
TurboTax / H&R Block “Audit Defense”
- Coverage: They will handle the correspondence with the IRS.
- Limit: They generally exclude “high volume crypto trading” or “business activity.” Read the fine print.
CoinTracker / Koinly
- Service: They provide the data to fight the audit. Some tiers include “Expert Review.”
- My Analysis: Essential. You cannot fight a data audit without a data tool.
Tax Protection Plus
- Service: A standalone audit defense membership.
- My Analysis: Check if they cover crypto specifically. Many legacy providers consider it “complex” and exclude it.
Comparison Table
| Service | Cost | Covers CPA Fees? | Covers Taxes Owed? |
| DIY (You) | $0 | No | No |
| Audit Defense Membership | ~$100/yr | Yes (Representation) | No |
| Tax Attorney | $400/hr | N/A (You pay) | No |
Step-by-Step Action Plan
- Don’t Ignore the Letter: You have 30 days to respond. Silence is admission of guilt.
- Consolidate Data: Use a portfolio tracker to sync all wallets and exchanges. Mark internal transfers as “Transfer,” not “Sale.”
- [IMAGE: Screenshot of CoinTracker showing how to tag a transaction as ‘Internal Transfer’]
- Hire a Crypto CPA: Don’t use a regular mall accountant. You need someone who understands “Gas Fees” and “DeFi Bridging.”
- Check Your Umbrella Policy: Some personal umbrella policies have limited coverage for “Administrative Hearings,” but it’s rare for tax disputes.
FAQ
Does the IRS see my MetaMask?
They see the exchange withdrawal to your MetaMask. From there, they use Chainalysis to watch the wallet.
What if I lost the keys?
You can claim a capital loss (Abandonment) only if you can prove you took steps to abandon it legally. Losing keys is a grey area in 2026.