Didn't report crypto to the IRS? Penalties, IRS letters and how to fix it

Maybe you sold some crypto a couple of years ago and didn’t realize it had to go on your tax return. Maybe you swapped tokens, earned staking rewards or got paid in crypto and assumed nothing was reportable until you cashed out. You’re far from alone, and it’s usually fixable. But the longer it’s left, the more it can cost.

This guide explains what the IRS can charge, how it finds out, how far back it can go and how to put things right.

Why it matters more now

The IRS has been focused on crypto for years:

• In July 2019 it began sending educational letters (Letters 6173, 6174 and 6174-A) to taxpayers with crypto transactions who potentially didn’t report income or report correctly. More than 10,000 taxpayers were due to receive them by the end of that August. The IRS said it was expanding its efforts, including increased use of data analytics.
• Every Form 1040 now asks the digital asset question, which you must answer Yes or No. See US crypto tax.
• From 2025, brokers report sales of digital assets on Form 1099-DA, with cost basis reporting for certain assets from 2026. That means the IRS receives the same numbers you do. See Form 1099-DA explained.

What the IRS can charge

If you owe tax you didn’t report, you’ll generally owe the tax, interest and possibly penalties:

A few details from the IRS:

• If both the filing and payment penalties apply in the same month, the failure-to-file penalty is reduced by the failure-to-pay amount.
• If a return is more than 60 days late, there’s a minimum failure-to-file penalty: $525 for returns due after 31 December 2025, or 100% of the tax owed if less.
• For individuals, an understatement is substantial if it’s more than 10% of the correct tax or $5,000, whichever is greater.
• The IRS charges interest on penalties, too.
• The failure-to-file penalty doesn’t apply if you can show the failure was due to reasonable cause.

The IRS also warns that, in some cases, taxpayers who don’t properly report crypto could be subject to criminal prosecution. That’s typically about deliberate concealment, not honest mistakes promptly corrected.

Interest: the cost of waiting

On top of any penalty, you’ll owe interest. The IRS explains how it works:

• Interest generally runs on unpaid tax from the original due date of the return (ignoring extensions) until you pay in full.
• It compounds daily.
• The rate is set every quarter: the federal short-term rate plus 3 percentage points. For October to December 2026, it’s 7% a year for individuals.
• The IRS also charges interest on penalties, but if a penalty is reduced or removed, the related interest is reduced or removed automatically.

So the sooner you correct a mistake, the less it costs.

An illustration

These numbers are made up to show how the pieces fit together. Suppose you correct a return and owe an extra $3,000 of tax:

• Tax: $3,000.
• Accuracy-related penalty: if the IRS finds the underpayment was due to negligence, 20% = $600.
• Interest: on the $3,000 from the original due date, at the quarterly rates in force, compounding daily, plus interest on any penalty.

Pay promptly, and the interest stops growing.

Can penalties be removed?

The IRS offers two routes for failure-to-file and failure-to-pay penalties:

• First Time Abate (FTA): if you filed on time for the previous three years and had no penalties in that period (other than an estimated tax penalty), or only ones later removed, you can ask for the penalty to be removed. You must contact the IRS, by phone or with Form 843, but you don’t need to name FTA or send documents.
• Automatic Exemption from Penalty (AEP): new from summer 2026. If you file or pay late on a 2025 tax year return or later, and the IRS’s records show three years of timely compliance, it won’t assess those penalties at all, and you’ll get a letter saying so.

Neither covers the accuracy-related penalty. If you don’t qualify, you can ask for relief based on reasonable cause.

How far back can the IRS look?

The IRS’s guidance on keeping records reflects the time limits:

• 3 years from filing, in the normal case.
• 6 years if you didn’t report income that you should have, and it’s more than 25% of the gross income shown on your return.
• No limit if you didn’t file a return, or filed a fraudulent one.

Keep your crypto records at least that long. See how to keep records.

How to fix it

1. Gather your history. Download transaction reports from every exchange you’ve used, including closed accounts if you can, and list wallet transactions.
2. Work out what was taxable. Sales, swaps, spending crypto, and income such as staking, mining, some airdrops or payment for work. See getting paid in crypto and staking taxes.
3. Calculate gains and losses using your cost basis. Remember that losses count too and can reduce tax.
4. File an amended return for each affected year, using Form 1040-X, with the corrected forms such as Form 8949 and Schedule D, or Schedule 1 for income. The IRS says Form 1040-X can be filed electronically for the current and two prior tax years; paper filing is still an option.
5. Pay what’s due, or contact the IRS about a payment plan if you can’t pay in full.
6. Keep copies of everything you file.

If you never filed for a year at all, file the missing return rather than an amendment. If the amounts are large or the situation is complicated, a tax professional can help.

If it was deliberate

The steps above are for honest mistakes. For people who willfully failed to comply, IRS Criminal Investigation runs a Voluntary Disclosure Practice, which can be a way to resolve the noncompliance and limit exposure to criminal prosecution. It requires a truthful, timely and complete disclosure, starting with Form 14457, full cooperation and payment of tax, interest and penalties; the disclosure period generally covers the most recent six years. The IRS has proposed changes to the practice, so anyone in this position should get specialist legal advice before acting.

If you’ve had an IRS letter

Read it carefully: some letters are educational, others propose changes or ask for a response by a deadline. The IRS said recipients of its crypto letters should review their filings and, where appropriate, amend past returns and pay back taxes, interest and penalties. Respond by any deadline given.

Beware of scams that copy IRS letters or calls. The IRS will never email, text or message you on social media with threats. See government impersonation scams.

Didn’t owe anything?

Not every crypto transaction creates tax. The IRS says you can answer No to the digital asset question if you only bought crypto with dollars and didn’t sell, or only moved it between your own wallets (unless you paid a fee in crypto). See when crypto isn’t taxed.