Crypto and Form 1099-K IRS inquiries: what the letter is asking

Two different kinds of questions

People receive IRS letters about crypto and about Form 1099-K for related reasons: a third party reported something, or the return answered a question in a way that does not match the records. Read the letter to see which applies. A 1099-K question is about payments received through cards, apps or marketplaces. A crypto question is about transactions in digital assets.

How the IRS treats digital assets

The IRS defines a digital asset as a digital representation of value recorded on a cryptographically secured ledger or similar technology, and treats digital assets as property under general property rules. Selling for U.S. dollars generally produces a capital gain or loss, with longer holding periods treated as long-term. Digital assets received for services are ordinary income measured in U.S. dollars when received.

The IRS also says taxable transactions must be reported whether or not you receive an information return. Capital transactions are reported on Form 8949, unless a Form 1099-DA provides basis, and Schedule D. Ordinary income goes on Schedule 1 or the applicable form.

The Form 1040 question

Every filer must answer the digital asset question near the top of Form 1040. IRS guidance says Yes normally applies if you received digital assets as payment, reward or award, received new assets from mining, staking or a hard fork, sold or exchanged an asset, or otherwise disposed of a financial interest in one. No normally applies if you only held assets, moved them between your own wallets, or bought them with real currency. The IRS fact sheet was written in 2024, so check the current-year form instructions.

Understanding a Form 1099-K

The IRS says Form 1099-K reports payments for goods or services received through payment cards and through payment apps or online marketplaces. A card processor sends one regardless of the number or amount of payments. For apps and marketplaces, the reporting threshold has changed several times, so check the current IRS page instead of relying on an old number, and note you may receive a form for lower amounts.

A form can include money that is not income. The IRS notes gifts and repayments of personal expenses, such as a roommate's share of rent, are not taxable. If your form includes such amounts, keep records showing what they were.

Example: an online seller and a casual trader

Consider a seller who cleared out a garage and sold used items at a loss through a marketplace. Her form shows total payments, yet most items sold for less than she paid. Her records, such as original receipts and listing screens, help explain why the form's total is not her income.

Compare a casual trader whose exchange sent no form for some trades. He still has to report taxable transactions. His records would be exchange histories, wallet addresses and dates, so he can show cost and proceeds for each sale.

Records to gather

Start with the platform's own exports and add your context.

• Transaction histories from each exchange, wallet or app
• Dates, amounts in U.S. dollars and what you received or gave up
• Cost records for assets you sold
• A short list of payments on the 1099-K that were gifts, reimbursements or personal sales at a loss
• Your return and the forms attached to it

Responding in writing

Be orderly and factual. If you find an error on your return, mention it and ask a qualified practitioner how to correct it. IRS Audit Defense Pro is software that helps you organize your facts and draft a response letter you review and send yourself; it is not a law firm, CPA or enrolled agent. For a mismatch letter, a response that walks from the reported figure to your actual figure, with attachments, is the shape that tends to be easiest to review.

Frequently asked questions

Sources

• IRS: Frequently asked questions on digital asset transactions
• IRS: Taxpayers need to report crypto and other digital asset transactions on their tax return
• IRS: Understanding your Form 1099-K
• IRS: Understanding your CP2000 series notice

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