The IRS has been sending out CP2501 crypto letters—the latest in a series of warnings to virtual currency investors who may not have correctly reported their income from crypto.
If you’ve received a CP2501 notice from the IRS, you must act fast to avoid getting slapped with a higher tax bill than you deserve. Read on to learn what this notice means and how to respond.
What is IRS Notice CP2501?
IRS Notice CP2501 is the government’s way to notify you that there is a discrepancy between what was reported on your tax return and other information the IRS has on file. This discrepancy may cause an increase or decrease in your tax liability or may not change it at all.
IRS Notice CP2501 is similar to the CP2000 crypto letter, which was sent to many crypto investors in 2020. Like the CP2000, the CP2501 is not reserved for cryptocurrency traders; anyone with a disparity on their federal tax return could receive the notice.
Unlike the CP2000, Notice CP2501 does not include a proposed amount owed. However, it will likely be followed up by a Notice of Deficiency if you don’t act in time.
Why did I receive the CP2501?
If you received a CP2501 notice, it is because the information reported to the IRS by third parties (like your employer or your cryptocurrency exchange) does not match the information you reported on your tax return. For example, if the W-2 your employer sends you at the beginning of the year does not match the information you reported to the IRS, you will likely get a CP2501 letter.
The same is true for cryptocurrency exchanges. Many cryptocurrency exchanges report their users’ trading activity to the IRS using Form 1099-B, Form 1099-K, or Form 1099-MISC. Unfortunately, these forms can paint a very inaccurate picture of your tax liability and make the IRS think that you owe a lot more than you actually do.
Form 1099-K only reports your total sales volume; this doesn’t account for any losses and can make it look like you had high capital gains even if you didn’t. Watch our video for more information.
In this example, the taxpayer bought and sold about $400,000 worth of cryptocurrency on Coinbase in 2019, and Coinbase reported this information to the IRS. That doesn’t mean the taxpayer has $400,000 of taxable income. However, that’s what the IRS will think if the crypto transactions aren’t fully reported.
Form 1099-B is much more accurate, but it can be lacking if you use more than one exchange or wallet. For example, moving your crypto off of Robinhood and into one of your wallets may be reported as a taxable transaction when it’s not. And Form 1099-MISC from Coinbase or another exchange only reports certain types of crypto rewards.
I received a crypto CP2501. What should I do?
If you’re confused by your CP2501 crypto letter or don’t think the numbers are correct, contact our cryptocurrency tax lawyers right away. Make note of the due date and do not wait until the last day to take action!
We’ll get to work ASAP on responding to the IRS with all of the appropriate documentation by the deadline listed on your letter. We will build or amend your complete crypto tax report for the year(s) in question. This includes recording every single cryptocurrency transaction that you made during those years.
We‘ve been doing crypto taxes since 2014 and have created hundreds of these reports, so you can rest easy knowing the pros are taking care of it.
The worst thing you can do is ignore the notice. Once the IRS finalizes the amount you owe, they can take extreme tax debt collection measures like levying your bank account or placing a lien on your home.
Do not wait—schedule a consultation with one of our industry-leading cryptocurrency tax attorneys today to get your issue resolved fast!