Received IRS Notice CP2000 for Crypto? Here's What To Do
Have you received a CP2000 Notice from the IRS? Don’t panic. Our guide covers exactly what you need to do if you've got a CP2000 relating to crypto investments.
What is a CP2000 Notice?
A CP2000 notice is a letter sent by the IRS if they have information about income from a third party that does not match the information you reported on your tax return. The CP2000 notice will include information about a proposed amount the IRS believes is due by a certain date. It is not a bill and you can respond to challenge the proposed sum if you believe the IRS has made an error.
Why have I received a CP2000 Notice?
CP2000 letters aren't exclusively sent to crypto investors, but many crypto investors have received them throughout the last few years, as well as IRS letters 6174, 6174-A, and 6173.
This is mostly due to 1099 forms issued by crypto exchanges. When you receive your 1099 form, the IRS gets an identical copy. So if your income doesn't match what's reported on your 1099 form, you may receive a CP2000 notice.
However, you must check your CP2000 carefully because 1099 forms often include missing or incorrect information.
The IRS receives limited data about your transactions via 1099 forms and may have an incomplete view of your gains, losses, and income. Particularly in the case of 1099-K forms, this form only reports your net proceeds for the year and as such may be much higher than your capital gains for the year. So read your CP2000 notice carefully before responding. Your notice will include an explanation of the changes and which third party has reported this information.
You can use a crypto tax calculator like Koinly to help you check whether the proposed sum in your CP2000 is correct.
How do I respond to a CP2000 notice?
You must respond to an IRS CP2000 notice within 30 days. How you respond all depends on whether you agree or disagree with the proposed sum.
If you agree with the sum the IRS has proposed you owe, use the response form included in your CP2000 notice to indicate you agree and send this to the IRS with payment. If you cannot pay the proposed sum, contact the IRS for payment plan options.
If you disagree with the sum the IRS has proposed you owe, use the response form included in your CP2000 notice to indicate you disagree. You'll need to provide evidence showing why you disagree. Koinly can help you generate reports covering your complete transaction history as evidence.
What happens if I don't respond to a CP200 notice?
If you ignore a CP2000 notice or don't respond within the specified time frame, you can expect to receive a Notice of Deficiency from the IRS, as well as the penalty as outlined in your CP2000 notice.
How is the IRS aware of my crypto transactions?
Crypto exchanges like Binance, Coinbase, Gemini, and more, all submit 1099 Forms to the IRS, detailing the transactions on their platforms. The most common 1099 form is now the 1099-MISC, but previously, 1099-K was issued by many exchanges.
1099-K is particularly problematic for investors as it encompasses all activities, including purchases, sales, and transfers, often resulting in a notably high figure that is not representative of actual gains or losses made.
As such, the IRS receives an inaccurate figure and has been known to issue CP2000 notices as a result. With the imminent implementation of Form 1099-DA - and the potential errors included - investors may be receiving an influx of CP2000 notices soon.
How Koinly can help
If you’ve received a CP2000, a crypto tax calculator can help you figure out whether your CP2000 notice is incorrect or not, and help with providing accurate calculations to the IRS. Try Koinly free today.