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audit cryptocurrency audit defense crypto regulation crypto tax guide cryptocurrency law Jul 14, 2022

You’re up at night worrying about the IRS coming after you. What are the odds?

The IRS Commissioner claims that there is over $1 trillion in taxes not reported which he blamed crypto traders for. That’s right. The IRS is vilifying all crypto traders (to get more money from Congress.)

What is the IRS doing about it? 

In May 2022, the IRS published some special statistics about audit rates to quell complaints from Congress.

The IRS statistics express audit rates in terms of Total Positive Income. 

How much is your Total Positive Income? 

They define this as income without expenses.

  1. You actively trade cryptocurrencies, whenever you exchange crypto for something else (another crypto, stablecoin, or fiat), the value of that sale is called the “proceeds.” How much the cost was doesn’t matter. The cumulative total of all your proceeds is the Total Positive Income amount. If you are a high-frequency trader, your Total Positive Income (TPI) could be enormous. Even if you had a net loss for the year, TPI is always a positive number. 
  2. You have home-business selling stuff on Amazon. During the year your revenue was $300,000. Regardless of whether you made a profit or loss was your Total Positive Income was $300,000.

Most of our crypto tax preparation clients would have a Total Positive Income greater than $1 million, many over $10 million, and numerous clients in the $100s of millions.

The IRS statistics below show very high audit rates. These are the chances of getting audited for 2019 only. The third column extrapolates these chances over a six year period.

These fresh audit rates reflect the IRS’ commitment to congress to dramatically ramp up audits on the wealth. It is easier for the IRS to shakedown crypto traders than the ultra-rich who can use a phalanx of lawyers to confuse the IRS. 

Six years is a long time?

The IRS gets six years after filing to audit a return if they can show you underreported your income by 25%; otherwise, they only get three years to audit. Because of the high TPI numbers, the six year window is easy for the IRS to hit. If the return is fraudulent (such as answering NO to the virtual currency question), then there is no time limit. If you only reported some or none of your crypto income, you have no protection.

These rates do not include “CP2000 examinations” which the National Taxpayer Advocate has called “unreal audits”. These CP2000 examinations occur several times higher than the audit rates.

How does the IRS know what my Total Positive Income is?

The IRS learns what Total Positive Income you have from three primary sources:

  • Crypto exchanges file Form 1099 with the IRS to report the income you received on their exchanges. This is not just fiat payouts of USD. This includes all trades.
  • Court summons to crypto exchanges operating in the U.S. This catches those exchanges that don’t file Form 1099.
  • Other taxable income is reported by an employer (Form W-2) or other payers (1099 and K-1).

If your report more TPI on your return than the IRS was expecting, that’s good. The IRS shouldn’t bother you.

How can you reduce your risk of an audit?

There are many ways to reduce your risk of audit besides reducing your Total Positive Income. 

CryptoTaxAudit is the third largest tax audit defense firm in the US. We are the largest audit defense firm focused exclusively on defending crypto investors. Our flagship offering, Audit Defense membership, not only provides you a comprehensive protection at no additional charge if audited but also offers incredible other benefits including early warning of a planned IRS audit, annual tax return risk assessment, and tax planning assessment services.

Visit and sign up for Crypto Audit Defense today.



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