How crypto activity is treated
The IRS generally treats digital assets as property, so selling them, trading one token for another, or using them to pay for something can each produce a gain or loss. Rewards from staking or mining are generally treated as income once you gain control of them. Each individual return also asks directly whether you received, sold, or exchanged digital assets, and an incorrect answer to that question can become an issue of its own. Exchanges now send customers and the IRS a dedicated information form for digital asset sales, and the IRS has used court-approved summonses to obtain customer records from exchanges.
Rebuilding basis and transfers
The most common problem in these audits is basis. Exchange reports often show proceeds without knowing what you paid, especially when coins were moved in from another wallet, and an examiner working from proceeds alone may treat the basis as zero until it is supported. Transfers between your own wallets are generally not taxable, but they need to be shown as transfers rather than sales. Exchange downloads, wallet addresses, blockchain records, and bank statements showing purchases are the usual tools for reconstruction. If a platform has shut down, records from its bankruptcy case, old emails, and bank transfers may fill the gaps.
Scope and exposure
Before responding, it helps to know which years and accounts the audit covers and whether other years show the same pattern. Losses from collapsed platforms or worthless tokens may be claimable, but the timing and character of such losses are often disputed. If digital assets were held on foreign platforms or used in ways you would rather not explain, talk to a lawyer before answering any questions. We review the letter, the transaction history you have, and the method used on the original return, then decide how the reconstruction will be built and presented. A consistent method applied across every year usually holds up better than adjustments made one transaction at a time.
