Why are thousands of crypto investors getting IRS warning letters — and should you worry?

Over the past 60 days, crypto tax software platform CoinLedger has witnessed a 758% increase in U.S. users receiving Internal Revenue Service letters, with accounting firms like Taxing Cryptocurrency confirming the same trend, CoinLedger CEO David Kemmerer told The Block.

Although President Donald Trump has expressed interest in eliminating taxes on U.S.-based cryptocurrencies, no related legislation has been introduced in Congress, he said via email. Meanwhile, many investors still mistakenly believe they don’t need to report crypto on their taxes, and IRS letters like this one are causing a lot of anxiety, he added. It could be the start of a broader enforcement wave, especially with new 1099-DA regulations set to kick in next year, Kemmerer said.

“We’re seeing a wave of confusion and fear among everyday crypto investors, many of whom made their best effort to report taxes accurately,” Kemmerer wrote. “With 1099-DA on the horizon, this kind of enforcement is only going to accelerate. The IRS has more visibility into crypto than ever before, but without accurate cost basis data, even compliant investors can get mistakenly flagged. That’s why it’s important to organize your record and be proactive about tracking taxable income.”

Starting on Jan. 1, 2026, crypto brokers must report both gross proceeds and cost basis of digital asset sales on Form 1099‑DA, meaning the IRS will automatically receive detailed gain/loss data for users — reducing underreporting and significantly increasing compliance oversight for crypto holders. However, in April, Trump signed a resolution to repeal a controversial IRS crypto rule finalized under Joe Biden that specifically would have also included DeFi platforms in the definition of brokers.

The IRS has been sending out several types of crypto-related warning letters, with varying severity for each, Kemmerer said.

What do the IRS crypto letters mean?

The most common IRS notice is Letter 6174 — a low severity educational reminder that crypto transactions may be taxable and should be reported, without implying any wrongdoing, Kemmerer explained. In many cases, recipients are crypto investors identified by the IRS through John Doe summonses issued to exchanges such as Coinbase.

Letter 6174-A suggests the IRS suspects underreporting, though no response is required. Still, taxpayers should carefully review their return and file an amendment if necessary — making it moderately serious, he said.

However, more serious notices like Letter 6173 and CP2000 are becoming increasingly frequent — requiring timely responses and potentially triggering audits if left unaddressed.

Letter 6173 indicates the IRS believes the recipient has underreported their income and requires a response by the specified deadline, or it could escalate to an audit. The most serious is the CP2000 notice, which outlines a proposed tax liability based on discrepancies in reported income. Taxpayers have just 30 days to respond, and failure to do so could result in additional penalties or collections, Kemmerer said.

Users ‘shocked’ to receive warnings

“Many of the users reaching out to us are shocked to receive IRS warning letters. These aren’t tax evaders, they’re everyday investors who held Bitcoin or Ethereum for years and thought they did everything right,” CoinLedger Customer Success Manager Ben Yoder said. “A common theme we’re seeing: people are worried about honest mistakes made several years earlier. For example, one customer was afraid of a potential audit because they did not report a few hundred dollars of crypto income in 2021.”

Taxpayers can receive these letters even if they reported their taxes accurately, often due to difficulties tracking cost basis across wallet-to-wallet transfers, Yoder explained.

“We’ve seen that wallet-to-wallet transfers are a major source of confusion,” he continued. “Many users don’t realize that while these transfers aren’t taxable, failing to keep proper records on them can lead to tax reporting issues.”

If someone receives an IRS letter but believes their crypto taxes were filed correctly, they can respond with documentation such as trade history or Form 1099s from exchanges to support their cost basis, Yoder said.

If they didn’t report crypto in a prior year, they can amend their return using Form 1040X and include a memo if significant changes are made, he added. While less severe notices like 6174 or 6174-A can be resolved by the recipient manually or by using crypto tax software, more serious letters like CP2000 or 6173 might warrant help from a tax professional, Yoder said.

In February, CoinLedger revealed that the average crypto investor’s portfolio saw gains of $5,482 in 2024, with HYPE and BTC contributing the largest unrealized gains, while ETH, ADA, and POL led the losses.