Clinton Donnelly

🚨CRYPTO INVESTORS: DO NOT SCAN THIS QR CODE A fake IRS notice is being mailed to crypto holders directing them to a bogus “Digital Asset Compliance Portal.” It looks very convincing. It isn’t real. Please spread the word.

Another major risk for married couples when one spouse is a crypto investor is the instinct to file joint tax returns. Filing jointly can reduce taxes in some cases , not dramatically, but enough that many couples default to it without thinking through the consequences. Here’s the problem. When you file jointly, the non-crypto spouse becomes legally liable for the accuracy of everything on that return, including the crypto reporting. But the non-crypto spouse usually has no idea what’s being reported, whether the capital gains are correct, whether the data is complete, or whether there are unreported transactions that could cause trouble later. That creates unnecessary exposure. This is why it’s often much safer for the non-crypto spouse to file separately. Filing separately protects them from any tax liabilities caused by the crypto spouse’s reporting mistakes or omissions. This protection becomes even more important in the event of a divorce. Once divorced, the non-crypto spouse is legally separated not just from the relationship, but also from the other partner’s past tax improprieties. So if you are a crypto investor, filing separately is usually the smarter move. What about the potential savings from filing jointly? You need to view those savings as not worth the long-term risk. You might save a small amount today, but you could pay a much larger price later if the IRS uncovers errors in the crypto reporting. Be careful. I strongly recommend filing separate returns in these situations.

One of the biggest issues we dealt with this year was the number of crypto traders getting divorced. Nobody wants to see that happen, and divorces can become extremely ugly and bitter. Typically, one spouse was the crypto trader and the other wasn’t. And the non-crypto spouse often assumes the trader is sitting on massive hidden wealth. The problem is, no matter what you tell that spouse about your actual holdings, they may not believe you. It’s far too easy, in their mind, to hide coins or fail to disclose everything. So a few things happen. First, during the divorce, the non-crypto spouse will usually insist on a full third-party audit and inventory of your accounts and records. They want verification that the cryptocurrency portfolio you’re disclosing is complete and accurate. That process alone can be very contentious. But the bigger problem lies beyond that. In a divorce, when you split assets, the cost basis of those assets transfers to the spouse receiving them. So when determining which crypto assets the non-crypto spouse gets, you also have to assign the correct cost basis for those specific assets. And that can get messy fast. You may have Ethereum you bought at one price and other Ethereum you bought at a completely different price. Now, during the divorce negotiation, you may find yourselves arguing over which specific ETH lots are being transferred. You can already see how ugly that can become. But here’s the hidden time bomb. Once the spouses split their crypto and split their cost basis, the non-crypto spouse suddenly has a brand-new tax reporting burden. And usually, they have no idea how crypto tax reporting works. They weren’t the trader. They weren’t involved. They don’t understand the rules. So what might happen? Maybe the first thing the non-crypto spouse does is sell all the crypto they received. They don’t realize that they’re triggering huge capital gains, and that they’ll owe taxes on that later. That can turn into a nightmare and reopen legal issues long after the divorce is finalized. But the deeper risk is this: an incorrectly filed tax return can bring IRS audits. If the IRS finds irregularities with one spouse, they may extend the audit to the other. Suddenly, two people who spent years fighting to separate themselves legally are back in the same boat, being pulled into a shared IRS problem, potentially pitted against each other. So what’s the smartest move? This entire situation is a powder keg. Splitting actual crypto assets between spouses intertwines your cost basis, your reporting obligations, and your long-term risk exposure. It’s far cleaner and safer for the non-crypto spouse to accept a cash distribution equal to the value of the crypto, instead of taking the coins themselves. Cash avoids the messy cost basis transfers. It avoids future tax errors. And it prevents both partners from being dragged back into legal or IRS trouble years later. Marriage is a beautiful thing. Divorce can make it really ugly.

Hey @JoelKatz, looks like we stirred up quite the storm! Who knew an IRS letter could cause this much excitement? Would love to have you on my podcast to continue the conversation. finance.yahoo.com/markets/cr…

Stolen Crypto? How do you actually prove this to the IRS?

UPDATE: Six weeks ago, I warned that the IRS was dramatically increasing the number of Letter 6174 notices being sent to crypto traders. What we've seen since then is alarming. Dozens more people, including our own clients, have contacted CryptoTaxAudit after receiving these exact letters. This is no longer an isolated handful of cases. Based on the volume we're seeing, I believe the IRS is conducting another large-scale mailing campaign targeting crypto taxpayers. Here's what you need to understand: IRS Letter 6174 is a voluntary compliance letter. It means the IRS has information about your cryptocurrency activity and wants you to review whether you've met your tax reporting obligations. It is NOT an audit. In my view, these letters are designed to put pressure on crypto taxpayers to review their past filings and take corrective action. But receiving one does not automatically mean you've done anything wrong. DO NOT rush into amending tax returns or sending information to the IRS without understanding your position first. Letters 6174 and 6174-A generally do not require a direct response, but you should review the instructions carefully. Six weeks ago, I raised the alarm. The number of people contacting us since then has only reinforced my concerns. Have you received an IRS Letter 6174 or 6174-A recently? Comment below. I want to understand just how widespread this latest wave has become. Please repost this. Crypto traders need to know what's happening.

Eliminate federal long-term capital gains tax on qualifying investments held for more than one year. Protect against abuse. Address the fiscal consequences. But stop treating long-term investment gains as another opportunity for government taxation. America needs investment, entrepreneurship and productive capital. We should be debating how to encourage those things, not simply how much tax to collect when investors succeed. If we want Americans to build wealth, why are we taxing them when they do?

Washington has built an extraordinarily complicated tax system. Tax credits. Deductions. Income thresholds. Phaseouts. Special exemptions. Yet we continue taxing people when they realize long-term investment gains, including gains partly attributable to inflation. Why not simplify the system and reward long-term capital formation? Tax short-term speculation differently if necessary. But someone who invests in a business, holds an asset for years and takes the risk of losing their capital should not automatically face another federal tax when that investment succeeds. And if eliminating the tax entirely isn't politically achievable, Congress should at least seriously consider adjusting capital gains for inflation. That would address one of the most obvious distortions in the current system.

Bitcoin hits $76k for the first time in several weeks. only one song for this. Happy Friday 🍻

What If We Eliminated Long-Term Capital Gains Tax? Imagine a tax system where qualifying investments held for more than one year could be sold without federal capital gains tax. Investors could move capital without triggering that tax penalty. Entrepreneurs could sell successful investments and reinvest their proceeds. Long-term investors could make decisions based more on economic opportunity and less on tax consequences. And people building wealth through stocks, crypto and business ownership would have a stronger incentive to invest for the long term. Would eliminating the tax automatically guarantee economic growth? No. It would come with significant fiscal costs and distributional consequences that Congress would need to address. But the potential benefits deserve serious consideration.

Received an IRS letter about crypto? Our crypto tax specialists will explain what the IRS is asking and what to do next. cryptotaxaudit.com/audit-let…

Why Should Long-Term Investors Be Penalized? In 2026, federal long-term capital gains tax rates generally stand at: • 15% for many investors • 20% for higher-income investors Some taxpayers also face an additional 3.8% net investment income tax. And depending on where they live, state taxes can increase the bill further. These taxes apply when qualifying gains are realized, even if the investor held the asset for decades. We should be encouraging people to invest patiently, fund businesses and build long-term wealth. Instead, we impose a tax when they finally decide to realize the gains.

Capital Gains Tax Creates an Incentive Not to Sell There's another economic problem that rarely gets enough attention. The lock-in effect. When investors have substantial unrealized gains, selling creates an immediate tax liability. So they hold. Not necessarily because the investment remains their best opportunity. But because selling triggers a tax bill. That can keep capital tied up in older investments instead of moving into startups, businesses and new opportunities. Consider a crypto investor who wants to exit a position and reinvest in a promising American company. Or a shareholder who wants to sell appreciated stock to fund a new business. The decision isn't simply about where their money could create the most value. They also have to consider how much of their accumulated gain will be lost to taxes. Tax policy shouldn't be a reason productive capital stays trapped.

Why America Should Eliminate Long-Term Capital Gains Tax Why does the government tax you on wealth you haven't necessarily gained in real terms? It's a question Washington should be asking. America encourages people to save, invest, build businesses and take financial risks. Then, when those investments succeed, the government taxes the gains. And here's the part that deserves more attention. Not all capital gains represent real wealth creation. We're Taxing Inflation, Not Just Profits Imagine you invest $100,000. Ten years later, your investment is worth $150,000. The IRS sees a $50,000 capital gain. But suppose cumulative inflation over those ten years was 30%. You would need $130,000 just to maintain the purchasing power of your original investment. Your real gain is closer to $20,000. Yet capital gains tax generally applies to the full $50,000 nominal gain. The government is effectively taxing part of the inflation-driven increase in the asset's price. You haven't gained $50,000 in purchasing power. But you're being taxed as though you have. How is that a fair measure of investment success?

As your tax situation becomes more complicated, you may not always know the exact amount for every income or expense item. This is common in business accounting. You might be able to document nine out of ten transactions that make up a figure, but the tenth transaction may be missing, forgotten, or difficult to place within the correct reporting period. Many factors can create uncertainty. Once you have reached the limit of what can reasonably be documented, you may need to make a reasonable, good-faith estimate of the correct amount. That means selecting a figure you can reasonably explain and justify based on the information available. A reasonable, good-faith estimate should be supported by a clear explanation of how you arrived at the number. It should also be made honestly, without deception or an attempt to manipulate the result. You are not automatically required to overpay your taxes simply because some transaction records are missing. In certain situations, reasonable conclusions can be drawn from the available evidence. One important example is the Cohan case, which dates back to the 1930s. George M. Cohan was an entertainer who travelled extensively but did not keep complete records of his hotel stays, meals, and other travel expenses. The government argued that because he did not have receipts, he should not be allowed to claim any of those expenses. The court disagreed. It recognised that although Cohan did not have complete documentation, he could not have travelled, stayed in different locations, and carried out his work without incurring some expenses. This became known as the Cohan rule. The principle allows a court, in appropriate circumstances, to estimate a reasonable expense when it is clear that an expense occurred but the exact amount cannot be proven. This type of reasoning also helps explain the use of per diem rates, which provide standard estimates for expenses such as lodging and meals when travelling.

One of the main reasons people become frustrated with crypto tax software is that they have gaps in their data. BitMEX, BitMart, and AscendEX all recently announced that they were closing down. If you did not download your transaction records before access was removed, you are left with gaps in your trading history. Without those records, it can become difficult to prove when you acquired your assets and what you paid for them. When crypto tax software does not have complete information, it may report higher gains than you actually need to include on your tax return. That can overstate your taxable income and cause you to pay more tax than necessary. Missing crypto data is very common, but there are ways to rebuild parts of the record. For example, you may still have trade confirmation emails from an exchange. These emails can show that, on a particular date and time, you bought or sold a specific asset. Although they are not the same as a complete transaction history, they can still serve as supporting evidence. We used this approach for a client we defended against the IRS who had moved a large amount of Bitcoin from an old exchange that had closed into his Coinbase account. The IRS challenged the incoming Bitcoin transactions during the appeals process because we did not have the original transaction history from the closed exchange. However, the client still had email confirmations from the old exchange. Those emails aligned with Coinbase’s records showing the incoming Bitcoin transactions. Together, the records helped demonstrate that the Bitcoin arriving in Coinbase was not new income. It was a transfer of the client’s own assets and therefore was not taxable as income. Because we were able to prove that, the audit was closed with no change to the client’s tax assessment. This is why preserving every available record matters. Even when a complete transaction history is missing, emails, wallet records, and receiving-exchange data may help reconstruct what happened.

Prediction markets are going to create serious tax confusion. Kalshi. Polymarket. Coinbase prediction products. The IRS has not issued clear guidance on how all of this should be treated. The big question is whether the activity is event-based or tied to financial markets. Betting on sports, elections, or other events may fall under gambling or wagering rules. That can mean limited losses, itemized deduction issues, and ordinary income treatment. But prediction markets tied to financial indicators, like commodities or market indexes, may look more like capital asset activity. That can mean capital gains treatment, loss carryforwards, and different tax results. Same “prediction market” label. Very different tax outcome.

Has receiving the 1099-DA made you more afraid to invest in crypto?

There's been a real rise in the number of letters that the IRS has been sending out regarding people's cryptocurrencies. One category is an informational letter. If it is a 6173, 6174, or 6174-A, then that is an informational letter. Now, what it says on it is kind of scary because basically, anytime you get a letter from the IRS, you tremble in your seat. But it's a little scary because it says, "We know you had cryptocurrency transactions on your past returns." Just kind of like a wide-open statement. And then it goes on to say that you need to make sure you reported everything correctly. So it's kind of a vague scare. They don't say any particular year, and they really don't know. They don't know what year. What this whole campaign is about, these three informational letters, is an ongoing campaign that the IRS has been doing. Now we're into the second year of them doing this. They send these letters out at roughly the rate of 10,000 a month, and they send them to people that they know have had cryptocurrency transactions. And it's simply educational. That's how the IRS looks at it. It's an educational letter. So you cannot deny in the future that you knew how to file your taxes related to cryptocurrencies because you got a letter from the IRS telling you how to do it. So that's what it's all about. If you get one, don't panic. It is, however, an educational tactic to make people without excuse if, in the future, they have to audit you. So that's all it's about. And the appropriate reaction is to save it and also to make sure you always report your cryptocurrencies going forward. If you haven't been reporting your cryptocurrencies, you probably ought to give us a call. You are now on their radar. Let us set up a strategy for you to move into compliance and to start to live in a way that you don't have to worry about the IRS knocking on your door.

What can you do if you've experienced a cryptocurrency theft? First of all, you want to start collecting data about what happened. You want to document everything. If you have a receipt showing that you bought a Ledger from a party that's now been shown to be illegitimate, save that receipt. If you can capture the transactions from your hardware wallet, download the transaction history and save it as a PDF. You want to preserve the wallet addresses, transaction hashes, dates, amounts, and any communications relating to the incident. Then you want to go to the FBI's Internet Crime Complaint Center, the IC3. They have a webaite where you can report cryptocurrency fraud and cybercrime. You basically get to tell your story. Now, filing a complaint doesn't guarantee that you'll recover your cryptocurrency. But the FBI uses these reports to identify patterns, aggregate information, and investigate criminal activity. And from a tax perspective, having a timely IC3 report can help support your account of what happened. You can also report it to your local police station. If you have a copy of that police report, that can help establish a record of the incident. Now, these reports don't automatically prove that you're entitled to a tax deduction. But they're important pieces of evidence. The IRS wants to see the hallmarks of someone who has genuinely experienced a theft. You had a police report, you had an IC3 report, and you maybe have copies of the transactions. We can look at those transactions. You can also work with companies that perform blockchain forensic analysis to help trace where the cryptocurrency went. They may be able to identify whether the receiving address has connections to known criminal activity. All of these things can help establish what happened. You also need to document how much you originally paid for the cryptocurrency and whether there's any reasonable prospect of recovering it. That's important because a qualifying theft loss deduction is generally based on your adjusted tax basis, subject to the applicable rules, not simply the cryptocurrency's market value when it was stolen. If you've lost a significant amount of cryptocurrency, the potential tax consequences can be substantial. But the amount of any deduction and the actual tax benefit will depend on your individual circumstances. So don't allow shame to prevent you from documenting what happened. If you've experienced one of these hardware wallet attacks, protect your remaining assets, preserve your evidence, and get knowledgeable tax advice. You may have options available, but you need the documentation to support them.