At Kugelman Law, cryptocurrency tax controversy is a core practice area. Founder Alex Kugelman has been featured on the Bitcoin.tax podcast and The Mark Milton Show, and has represented clients in crypto audits, John Doe summons follow-ups, voluntary disclosures, and Tax Court litigation involving virtual currency. This guide explains the differences among the three letters, the risks of ignoring them, and how to respond effectively.

Why You Received an IRS Crypto Letter

The IRS initially issued Letters 6173, 6174, and 6174-A in 2019 to roughly 10,000 taxpayers identified through cryptocurrency exchange records. The program expanded substantially in subsequent years, and additional waves — including the more recent Letter 6371 — continue to be sent following new summons enforcement, routine 1099-B and 1099-DA matching, and data obtained through the Operation Hidden Treasure initiative.

In every case, the common denominator is the same: the IRS has matched your taxpayer identification number to cryptocurrency transaction activity that either does not appear on your return, appears in a manner inconsistent with third-party reporting, or raises compliance questions the agency wants resolved voluntarily.

Letter 6174: The “Soft” Notice

Letter 6174 is the least severe of the three. It is an educational notice — sometimes called the “no response needed” letter. The IRS is telling you it has information suggesting crypto activity and reminding you of your obligations to report virtual currency transactions. You are not required to respond.

That said, “not required” and “should ignore” are different things. If you received Letter 6174 and your returns did not accurately report crypto gains, losses, or income, the letter is a warning that the agency is watching. Correcting the issue through an amended return is far cheaper than waiting for a CP2000, an audit, or a criminal referral.

Letter 6174-A: The Escalated Soft Notice

Letter 6174-A resembles Letter 6174 but uses firmer language. It informs you that the IRS believes you may not have reported your crypto activity correctly and that you should review your returns and file amended returns if necessary. No response is technically required — but the IRS has flagged you at a higher confidence level, and the letter preserves the agency’s record that you were put on notice.

Receiving Letter 6174-A materially raises the stakes. If a subsequent examination determines that you underreported and the IRS can show you ignored 6174-A, the willfulness analysis — which drives the difference between a 20% accuracy-related penalty and a 75% civil fraud penalty — shifts dramatically against you. Reasonable cause defenses become harder to sustain when the agency can prove you were warned.

Letter 6173: The Response-Required Notice

Letter 6173 is fundamentally different. Unlike 6174 and 6174-A, it requires a response. The letter directs you to do one of three things by the stated deadline:

1. Certify under penalty of perjury that you properly reported all crypto transactions and owe no additional tax
2. File amended returns correcting any underreporting and pay the associated tax, interest, and penalties
3. Provide a detailed explanation of why you believe you are in compliance

The response is signed under penalty of perjury. That phrase matters. A false certification exposes you to penalties under 26 U.S.C. § 7206 — a felony carrying up to three years in prison and substantial fines. Signing a Letter 6173 response without a thorough pre-response review is among the riskier things a taxpayer can do in the tax controversy landscape.

Consequences of Ignoring Letter 6173

Failure to respond to Letter 6173 virtually guarantees an examination. The letter is not a random educational mailing — it is an enforcement tool, and the IRS has allocated examination resources specifically to pursue non-responders. Audits that follow ignored 6173 letters have elevated referral rates to IRS Criminal Investigation (CI), particularly where the transaction volume is significant.

What the IRS Already Knows About Your Crypto

By the time you receive any of these letters, the IRS has typically obtained your exchange records through one or more of the following channels:

• John Doe summonses served on Coinbase (2016), Kraken (2021), Circle/Poloniex (2021), SFOX (2022), M.Y. Safra Bank (2022), and various other exchanges
• 1099-B, 1099-MISC, 1099-K, and 1099-DA reporting from U.S. and U.S.-serving exchanges
• Cross-matching against Operation Hidden Treasure data
• Blockchain analytics performed by contractors such as Chainalysis and CipherTrace
• Information exchanges with foreign tax authorities under tax treaty and CRS frameworks

The exchange data the IRS receives typically includes gross proceeds from sales and dispositions, but frequently not cost basis. This asymmetry is what makes crypto tax audits expensive to defend: the IRS computer presumes zero basis, generating inflated proposed assessments. Reconstructing accurate basis across multiple exchanges, wallets, DeFi protocols, and chain bridges is technical work that benefits substantially from counsel and experienced forensic crypto accounting — a service we provide through our cryptocurrency accounting and audits practice.

How to Respond to an IRS Crypto Letter

Step One: Do Not Certify Without a Full Review

For Letter 6173 specifically, the temptation to sign a quick certification that everything was reported correctly is exactly the wrong move. Before certifying anything under penalty of perjury, every transaction must be reconstructed and reconciled against what was actually reported on the relevant year’s return.

Step Two: Reconstruct Your Transaction History

This requires pulling API-level data from every exchange, wallet, and DeFi protocol you used, mapping cost basis through transfers, identifying taxable events (including swaps, staking rewards, airdrops, hard forks, liquidity provision, lending, and NFT transactions), and applying a consistent accounting method. The output is a reconciliation that can be compared, line by line, against the returns as filed.

Step Three: Quantify the Exposure

Once the reconstruction is complete, you will know whether there was underreporting, and by how much. That figure — combined with penalty exposure and statute-of-limitations analysis — drives the response strategy.

Step Four: Choose the Right Path

Depending on the facts, appropriate paths may include:

• Filing amended returns and paying the tax, interest, and a potentially abatable penalty
• Submitting a formal response to Letter 6173 explaining compliance with supporting documentation
• Pursuing a Voluntary Disclosure Practice submission if the conduct involved willful underreporting
• For taxpayers with foreign exchange exposure, coordinating with Streamlined Offshore Procedures or Delinquent FBAR Procedures where applicable

Foreign Exchanges, FBAR, and Form 8938

If you held cryptocurrency on foreign exchanges — Binance (non-U.S.), Bitstamp, Bitfinex, KuCoin, OKX, or others — you likely have additional reporting obligations beyond income tax. FBAR filings (FinCEN Form 114) and Form 8938 filings under FATCA may apply, with penalty exposure that can be significantly higher than the underlying income tax liability. This is a frequent blind spot for U.S. crypto investors, and we address it directly through our offshore disclosure practice alongside our crypto work.

Criminal Exposure and Attorney-Client Privilege

Crypto cases sometimes carry criminal exposure — particularly where transaction volume is high, willful conduct is alleged, or funds were routed through mixers, tumblers, or privacy coins. An attorney-client privileged engagement is materially different from engaging a CPA or enrolled agent alone. CPA communications are not privileged in criminal matters under most circumstances; attorney communications are. If criminal exposure is a realistic concern, counsel should lead — and should engage any needed forensic accountants under a Kovel arrangement to extend privilege.

How Kugelman Law Handles IRS Crypto Letters

Our engagement begins with a paid, privileged consultation with Alex Kugelman. We review the letter, the relevant returns, and the exchange activity the IRS is likely relying on. We coordinate with our forensic crypto accounting partners to reconstruct transaction history where necessary, develop a response strategy calibrated to the specific letter and the client’s exposure, and handle all communications with the IRS. When audit or Tax Court work is required, we carry the matter through. Our firm has resolved crypto-related cases ranging from simple reconciliation errors to matters involving hundreds of thousands of transactions and seven-figure proposed assessments. Results depend on specific facts. Past results do not guarantee future outcomes.

Speak with a Cryptocurrency Tax Attorney

Kugelman Law offers paid, privileged consultations with founder Alex Kugelman — fully protected by attorney-client privilege. We do not offer free consultations. This is the same attorney-client privilege that protects you from having your communications discovered later in an audit or criminal matter.

Call (415) 968-1780 or schedule your consultation here. We represent cryptocurrency investors throughout California and nationwide.

Frequently Asked Questions About IRS Crypto Letters

Is Letter 6173 an audit?

Not yet. Letter 6173 is a response-required compliance notice. Ignoring it or submitting a false certification under penalty of perjury substantially increases the probability of a full examination — and in some cases, a criminal referral.

What’s the difference between Letter 6174 and Letter 6174-A?

Letter 6174 is educational and does not require a response. Letter 6174-A uses firmer language, reflects a higher IRS confidence level that you may have underreported, and materially strengthens the government’s willfulness case if noncompliance is later confirmed.

How much time do I have to respond to Letter 6173?

The letter states a specific deadline — typically 30 to 60 days from the date on the notice. That deadline can sometimes be extended by written request, but the extension should be negotiated by counsel rather than assumed.

Can I amend my returns instead of responding to Letter 6173?

Amending returns is one of the permitted responses and is frequently the right path. The amendments should be prepared carefully, pay tax plus interest and accuracy-related penalty exposure, and be accompanied by an appropriate response letter. Our firm regularly handles this process end to end.

What if the crypto activity was years ago and I didn’t know it was taxable?

Lack of knowledge does not eliminate the tax liability, but it can support reasonable cause defenses against penalties. The critical question is whether returns should be amended and what the penalty exposure looks like once the numbers are computed. Our unfiled and amended return practice addresses these scenarios routinely.

Will the IRS share my response with state tax authorities like the FTB?

Yes. The IRS and California Franchise Tax Board regularly share information, and federal amendments generally trigger state amendments. California residents should expect FTB follow-up on any federal crypto adjustment.

Do I need an attorney or can a CPA handle this?

A CPA can handle the reconciliation work. What a CPA cannot provide is attorney-client privilege in a criminal matter. If there is any realistic possibility of willfulness, fraud, or criminal exposure, counsel should lead and should engage forensic accounting under a Kovel arrangement to extend privilege. For smaller, clearly non-willful matters, a CPA may be sufficient — but the evaluation of which category you are in is itself something counsel is best suited to make.

Does Kugelman Law offer free consultations for crypto letters?

No. We offer paid, privileged consultations with Alex Kugelman. Because these matters can carry criminal exposure, privilege matters from the first conversation — and a free intake call is not privileged.

About the Author: Alex Kugelman

Alex Kugelman is the founder and managing attorney of Kugelman Law, a boutique tax controversy and cryptocurrency tax firm serving clients throughout California and nationwide. Admitted to the California Bar in 2008 (No. 255463) and the U.S. Supreme Court, Alex has nearly two decades of federal tax controversy experience, including litigation in U.S. Tax Court and U.S. District Court. He served as San Francisco Chair of the Federal Bar Association’s Tax Division in 2018 and is a member of the Marin County Assessment Appeals Board. He is a nationally recognized cryptocurrency tax authority, featured on the Bitcoin.tax podcast and The Mark Milton Show. J.D., Chapman University Fowler School of Law (2007); B.A., University of Colorado at Boulder (2001). Read Alex’s full bio.

The rise of “pig butchering” crypto scams has left thousands of investors financially devastated. These sophisticated, long-con frauds build trust over months, convincing victims to invest huge sums into fake platforms before vanishing with the funds.

If you have fallen victim to one of these schemes, you know the pain is not just emotional—it is a financial catastrophe. However, there may be a way to mitigate the damage through the tax code.

Under Internal Revenue Code (IRC) § 165(c)(2) and recent IRS guidance, victims of fraudulent investment schemes may be eligible to claim a theft loss deduction. At Kugelman Law, we specialize in helping clients substantiate these claims to validly reduce their taxable income.

The Legal Basis: IRC § 165(c)(2) and IRS Guidance

Historically, the Tax Cuts and Jobs Act of 2017 suspended “personal casualty and theft losses” for individuals from 2018 through 2025. This led many to believe that all theft losses were non-deductible. This is not true.

The suspension applies to personal losses (like a stolen watch or a burglary). It does not apply to losses incurred in a “transaction entered into for profit.”

A recent IRS Chief Counsel Memorandum (No. 202511015) specifically analyzed the tax treatment of pig butchering crypto scams. The IRS concluded that because victims transferred funds with the clear intent to invest and generate a profit, these losses can be classified as investment theft losses under IRC § 165(c)(2), rather than disallowed personal losses.

Key Eligibility Requirements

To claim this deduction successfully, you must meet specific criteria:

• Proven Theft: You must show that the taking of your property was illegal under state law and done with criminal intent (e.g., fraud, larceny, or embezzlement).
• Profit Motive: You must demonstrate that your primary motive for transferring the funds was to make an investment profit. This distinguishes your case from “romance scams” where funds are sent as gifts or for personal help, which the IRS typically disallows.
• No Reasonable Prospect of Recovery: You must determine that the loss is permanent and that there is no likely path to recovering your funds from the scammers or a third party (like insurance).

How Kugelman Law Can Help

Claiming a theft loss deduction is a high-stakes tax position. It requires meticulous documentation to survive IRS scrutiny, similar to the rigor required for cryptocurrency audits. We offer specialized services to help victims report this loss correctly and defensibly.

1. Tax Return Preparation & Reporting

We can prepare your tax return to properly report the theft loss. This involves calculating your “cost basis” (the actual amount of money you put in, not the fake “gains” shown on the scam website) and filing the appropriate forms to claim the deduction against your taxable income.

2. Legal Opinion Letter

For significant losses, we highly recommend a formal Legal Opinion Letter. This document details the facts of your case, applies the relevant tax law (including the new Chief Counsel Memo), and provides a legal conclusion on your eligibility for the deduction. This serves as your primary defense should the IRS ever question the claim.

An opinion letter serves two primary purposes: (1) reasonable reliance defense against penalties if a tax agency audits the return and proposes penalties and (2) real time documentation and analysis that is ready to go in the event there is an audit.  

3. Comprehensive Package

We offer a combined service that includes both the legal opinion letter and the full preparation of your tax return for a bundled discounted fee.

Necessary Documentation

To substantiate your claim, we will need to compile a comprehensive evidence file, including:

• Complete Account Statements: Bank ledgers and crypto exchange records showing the trail of funds moving from your possession to the scammer’s wallets.
• Proof of Investment Intent: Screenshots of the fake trading platform, “account balances,” and logs of communications with the scammers where investment returns were discussed.
• Law Enforcement Reports: To prove the loss was a “theft” and not just a bad investment, you must file reports with authorities. We recommend filing with:
  • FBI via IC3: https://www.ic3.gov/
  • Secret Service Cyber Crime Task Force: https://www.secretservice.gov/
  • FTC Report Fraud: https://reportfraud.ftc.gov/
  • Your local police or sheriff’s department.

A Note on Civil Recovery

Please note that Kugelman Law focuses exclusively on the tax reporting and deduction aspect of your loss. We generally do not handle civil asset recovery (suing to get the money back) on a contingency basis.

However, we can refer you to attorneys who specialize in civil recovery for these types of fraud.

Take the Next Step

If you have suffered a loss from a pig butchering or crypto investment scam, do not let the tax implications add insult to injury. You may be able to recoup some of your losses through a lower tax bill. If you need help, our tax resolution attorneys can guide you through the process.

Contact Kugelman Law today to schedule a consultation and discuss your eligibility for a theft loss deduction.

Disclaimer: This post is for informational purposes only and does not constitute legal or tax advice. Consult a qualified professional for guidance on your specific situation.