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Crypto Tax Accounting and IRS Crypto Audit Defense
Quick answer: Crypto tax accounting means turning years of exchange, wallet, and DeFi activity into an accurate, defensible record of cost basis, gains, and income. With brokers now reporting to the IRS on Form 1099-DA, gaps in those records are easier for the IRS to spot.
Kugelman Law pairs tax attorneys with crypto accounting professionals, including licensed CPAs, so your numbers and your legal position are built together. Call (415) 968-1780 for a paid, privileged consultation.
Who we help
We work with people and businesses whose crypto activity has outgrown ordinary tax software or a general accountant. Clients typically come to us when:
- They traded across several exchanges and wallets and cannot produce reliable cost basis.
- Their Form 1099-DA or exchange records do not match what they reported.
- They received an IRS crypto letter, such as Letter 6173, 6174, or 6174-A.
- They are under IRS or state audit for crypto activity.
- They never reported crypto in prior years and want to fix it the right way.
- Their business accepts, holds, or pays in digital assets.
We represent clients throughout California and, for federal tax matters, nationwide. All work can be handled remotely.
Crypto accountant or crypto tax attorney?
Many people searching for a crypto accountant actually need both skill sets. Accounting answers what happened and what the numbers are. Legal advice answers what position to take, what to file, and how to deal with the IRS.
The difference that matters most is privilege. Communications with your attorney are protected by attorney-client privilege, while ordinary accountant communications have much narrower protection and generally none in a criminal matter.
When accounting work is needed to help an attorney advise you, it can be performed at counsel’s direction under what is known as a Kovel arrangement. That structure is designed to keep sensitive work within the privilege when the facts are difficult, such as unreported income from prior years.
What our crypto tax accounting covers
- Cost basis reconstruction. Tracing coins from purchase, through transfers between your own wallets and exchanges, to sale, including for closed or defunct exchanges.
- Transaction classification. Separating taxable sales and swaps from non-taxable transfers between your own accounts.
- Income reporting. Staking, mining, airdrops, hard forks, and rewards, valued at the right time and in the right way.
- DeFi and NFTs. Liquidity pools, wrapped tokens, lending, and NFT purchases, sales, and royalties. See our NFT accounting and tax compliance page.
- Return preparation and amendments. Current-year crypto reporting and amended returns for prior years, with the legal analysis behind each position.
- Business crypto accounting. Payments received or made in crypto, payroll paid in digital assets, and treasury holdings.
For a step-by-step look at how we work, read the Kugelman Law crypto tax accounting process.
Form 1099-DA changed crypto tax accounting
Starting with sales in 2025, U.S. crypto brokers began reporting gross proceeds to the IRS on Form 1099-DA. For assets acquired in a custodial account on or after January 1, 2026, brokers also report cost basis.
That leaves a large gap. For coins bought before 2026, or moved in from another wallet, the form may show what you sold for but not what you paid. If basis is missing or wrong, the IRS can compute your gain as if your cost were zero.
Since January 1, 2025, IRS rules also require tracking basis wallet by wallet rather than across your whole portfolio. Reconciling your records to every 1099-DA, and documenting basis the IRS cannot see, is now central to accurate crypto tax reporting. Read more on Form 1099-DA and its delays.
IRS crypto audits and letters
The IRS has more crypto data than ever. It draws on broker reporting, court-ordered summonses to major exchanges, and the digital asset question on every individual return.
Enforcement often starts with a letter. Letters 6173, 6174, and 6174-A each signal different levels of concern and call for different responses; see our guide to IRS Letters 6173, 6174, and 6174-A.
Common issues that lead to adjustments include:
- Missing cost basis, so the IRS treats the full sale price as gain.
- Crypto-to-crypto trades reported as like-kind exchanges, which have not been allowed for crypto since 2018.
- Unreported staking, mining, airdrop, or fork income.
- Transfers between your own wallets mistaken for sales or income.
- Foreign exchange accounts that also held cash or other assets and triggered FBAR or Form 8938 reporting.
Many crypto audits also involve an Information Document Request. See responding to an IRS IDR in a crypto audit.
Audit defense informed by a former IRS Revenue Agent
Our crypto audit defense is informed by Otto Bosch, a former IRS Revenue Agent from the Global High Wealth group of the Large Business & International Division. He knows how examiners build a case and what records they expect to see.
We use that perspective to challenge the IRS’s numbers, present a reconstruction the examiner can follow, and protect clients from accuracy and fraud penalties. If an audit cannot be resolved, we take the case to IRS Appeals or the U.S. Tax Court.
Both of our attorneys are admitted to practice before the U.S. Tax Court. Learn more about our broader IRS and FTB audit defense.
Never reported crypto? Fix it before the IRS asks
If you have unreported crypto from prior years, how you come forward matters. Amended returns, a formal disclosure, or simply getting current going forward can each be right, depending on the amounts and whether the failure was willful.
Coming forward before the IRS contacts you is one of the strongest facts in your favor. Make the decision with counsel, under privilege, before you file anything. See our guide, Sold Crypto at a Loss? You Probably Still Had to Report It.
Crypto on foreign exchanges
An account that holds only cryptocurrency on a foreign exchange is not currently reportable on the FBAR under FinCEN Notice 2020-2. An account that also holds cash, stablecoins treated as cash, or other assets usually is, once your foreign accounts exceed $10,000.
Form 8938 may apply separately. If you missed foreign reporting, see our delinquent FBAR page and our offshore tax attorney page.
Scams and stolen crypto
If you lost crypto to a scam, a theft loss deduction may be available when the loss arose in a profit-motivated transaction. Timing and documentation are critical. See our pig butchering crypto scam page.
How we work
- Privileged consultation. We review your situation, your records, and any IRS correspondence under attorney-client privilege.
- Data collection. We gather exchange exports, wallet addresses, 1099-DAs, and prior returns.
- Reconstruction. Our accounting team rebuilds your transaction history and cost basis, wallet by wallet.
- Legal analysis. We decide the reporting positions, amendment or disclosure strategy, and how to present the work to the IRS.
- Filing or response. We prepare returns, amendments, or audit responses.
- Representation. We deal with the IRS directly through examination, appeals, and, if needed, U.S. Tax Court.
Why clients choose Kugelman Law
Attorneys and accountants in one team. Your numbers and your legal strategy are built together, with privilege protecting the work where it matters.
Inside knowledge of IRS examinations. A former IRS Revenue Agent on the team shapes how we prepare records and respond to examiners.
Nationally recognized for cryptocurrency tax. Founder Alex Kugelman has discussed IRS crypto enforcement on the BitcoinTaxes podcast and The Mark Milton Show, and is a former judicial law clerk at the U.S. Tax Court.
Talk to a Tax Attorney
Get clear, confidential answers about your tax situation.
Schedule a paid, privileged consultation with Kugelman Law. Everything you share is protected by attorney-client privilege.
Frequently asked questions
Do I need a crypto accountant or a crypto tax attorney?
If your records are simple and current, an accountant may be enough. If you have missing basis, unreported prior-year activity, an IRS letter, or an audit, you also need legal advice, and attorney-client privilege can protect sensitive work. Kugelman Law provides both together.
What is Form 1099-DA?
Form 1099-DA is the IRS form crypto brokers use to report digital asset sales. Gross proceeds reporting began with 2025 sales, and cost basis is reported for assets acquired in a custodial account on or after January 1, 2026. Older or transferred-in assets may show no basis.
What if my 1099-DA does not match my records?
Do not simply ignore it or copy it onto your return. Reconcile the form to your records, document the correct basis, and report accordingly. A mismatch left unexplained can lead to an IRS notice proposing tax on the full proceeds.
Can you reconstruct cost basis if an exchange closed or my records are gone?
Often, yes. We rebuild histories from blockchain data, bank records, emails, and other exchange records. Where records are incomplete, we document reasonable, supportable estimates and the method behind them.
How does the IRS find out about my crypto?
Through broker reporting on Form 1099-DA, summonses to exchanges, the digital asset question on your tax return, and data analytics. Assume the IRS can see more of your activity than you might expect.
I never reported my crypto. What should I do?
Talk with a tax attorney before filing anything. Depending on the amounts and whether the failure was willful, the answer may be amended returns, a formal voluntary disclosure, or another approach, and the order of steps matters.
Do I have to report crypto on an FBAR?
An account holding only virtual currency is not currently FBAR-reportable under FinCEN Notice 2020-2. A foreign exchange account that also holds cash or other assets usually is reportable once your foreign accounts exceed $10,000.
What does a consultation cost?
We offer paid consultations fully protected by attorney-client privilege; we do not offer free consultations. A paid consultation gives you a real analysis of your records and your options. Call (415) 968-1780 to schedule.
About the author
Alex Kugelman is the founder and managing attorney of Kugelman Law and a former judicial law clerk at the U.S. Tax Court. He is nationally recognized for cryptocurrency tax and has appeared on the BitcoinTaxes podcast and The Mark Milton Show discussing IRS digital-asset enforcement.
Alex was also quoted in the Financial Times and the New York Post in July 2026 on California tax policy.
Otto Bosch contributed to this page. He is a former IRS Revenue Agent from the Global High Wealth group of the IRS Large Business & International Division, an IRS Enrolled Agent, and was quoted in Tax Notes in 2026 on IRS examination training.
Talk to a crypto tax attorney
Whether you need clean books for this year or a defense for past years, start with a privileged conversation. The earlier we see your records, the more options you have.
Schedule a paid, privileged consultation by calling (415) 968-1780 or visiting our contact page.
This page is attorney advertising and general information, not legal advice. Digital asset tax rules change frequently, and the right approach depends on your specific facts. Contacting Kugelman Law does not create an attorney-client relationship.