Tax lawyer here but not legal advice.

The first correspondence you received from the IRS is threatening a lien? That seems strange. I would expect they would have issued you an information audit first (basically: hey, can you give us more details on this?).

If we're talking big money, I'd say skip the accountant and go right for a tax attorney. Contact the federal bar.

Edit: I have heard good things about Moskowitz LLP: https://moskowitzllp.com/practice-areas/cryptocurrency-tax-a...

Apparently the audit took place last year, but I never received any letters as I've been moving about every year. I am on the phone right now and they told me the account is in collection, which means they can place a lien, had it not been for the covid-19 related pauses?

I vaguely remember logging into the IRS website last year and not seeing indication of this.

What I reported in 2017: SHORT TERM NO 1099B sale amount: $99,xxx.00 SHORT TERM NO 1099B cost AMOUNT: $97,xxx.00 NET SHORT-TERM GAIN/LOST $1,9xx.00

IRS audit reassessment amount: $33,xxx.00

This supports the theory that the IRS interpreted: SHORT TERM NO 1099B sale amount: $99,xx.00 SHORT TERM NO 1099B cost AMOUNT: $0 NET SHORT-TERM GAIN/LOST $99,xx.00

I was shuffling money back and forth and the position was never larger than $8,000.

Based on what the agent is currently telling me on the phone, their notes indicate Coinbase reported my 1099k as being $99,xxx.00 of income....

1099s are pretty frequently issued with incorrect amounts. Have you retained all your records to prove your cost basis/etc.?

General informational link: https://www.irs.gov/appeals/collection-due-process-cdp-faqs

Definitely get in touch with a tax attorney before you go further with the IRS, and watch what you say.

I was just on the phone with them before see your message.

So apparently Coinbase reported my 1099k as having an income of $99,xxx.00

Before this, I had no idea what a 1099k is, actually. I'm a salaried employee who receives w2.

Apparently I was supposed to file a schedule C for my cost basis, which I don't believe I did. I filed form 8949 instead.

I have a CSV of my trades from Coinbase as the cost-basis. I'm not sure if that is legitimate enough. I'm not sure Coinbase keeps records back to 2017....

The agent told me that the next steps are to receive the documents related to the audit and file an amended tax form with schedule C.

Schedule C is for business deductions, are you mining/staking as a business? If so, you'll owe self-employment tax. If not, you probably want to file it as hobby income which is Form 1040 Schedule 1. You can't take deductions from it, but I would be surprised if the deductions offset the aforementioned self-employment tax so as to make Schedule C worth it.

Right. I have a question mark on the schedule C bit. This will be a question I will leave for the tax pros.

What I know is that Coinbase reported a 1099k with an income of $99,xxx.00

In addition to the income reassessment, the IRS also pegged on:

Total Self Employment Tax: $2,6xx.00

And no, I did not mine or stake.

Imagine you have $10, you buy $10 of Bitcoin, sell for $13, wait for Bitcoin price to drop, buy $13 worth of Bitcoin, sell it for $20. You've made a total of $10 profit. The way the IRS decided to interpret this is that I made a profit of $33. In fact, if bought $10 of BTC, sell for $50, buy $50 worth, sell for $9, you've actually lost money, but the IRS would tax you on $59 of proceeds.

This theory matches up with the numbers that the IRS beliefs I owe them.

It sounds like the tax software you used screwed something up and did not account for your cost basis correctly. I would just pay an accountant who has experience with crypto trades to file it for you properly. The IRS is pretty reasonable if you provide documentation correcting mistakes.

Well, the numbers output by the program are reasonable.

Total proceeds - total cost basis = taxable income

My theory is that the IRS is interpreting the total cost basis as $0. They are ignoring all my BUY events and that the crypto is appearing out of thin air (without regard for law of conservation of energy and costs Elon Musk is complaining about).

The reason I didn’t originally go to a tax professional is because my computer program made 100,000 trades. I didn’t trust a mom and pop shop to properly account this this, especially since there were trades between different cryptocurrencies which makes the situation even more complicated.

Atleast the service’s output is within the same order of magnitude as the money I withdrew from the exchange, less the money I deposited in. Whereas the IRS liability is 20x this

A lot of this is reflective of bad tax advice. Not blaming you just observing.

>Total proceeds - total cost basis = taxable income

Not taxable income but capital gains (unless you're talking about coins you mined, which is indeed ordinary income).

>I didn’t trust a mom and pop shop to properly account this this, especially since there were trades between different cryptocurrencies which makes the situation even more complicated.

It really doesn't make it much more complicated for taxes owed purposes. As far as the IRS is concerned, you can't "buy" anything with cryptocurrency. Its akin to a bartering of capital assets. So if you buy $10 worth of BTC and it appreciates and you use it to buy $100 worth of ETH and then you sell the ETH at $200 you have $190 of short or long term capital gains, depending on how long that all took. Cryptocurrency is property, not currency, for IRS purposes. Each of those transfers is a taxable event, but the tabulations is relatively straightforward and should be well within the grasp of a moderately with-the-times CPA.

As I mention above, get a tax attorney now if these values are anything you can't afford just straight up having to pay, plus fines, at the end of all this.

I used these guys.

https://bitcoin.tax/home

You can choose different accounting algorithms ( FIFO, LIFO, average cost )