When You Can’t Pay –
Options for Crypto Investors Facing Tax Debt

Many crypto traders are discovering they need to catch up on years of unreported transactions.

Whether you’ve recently learned that crypto-to-crypto trades are taxable events, received a notice from an exchange that shared your trading data with the IRS, or simply fallen behind on reporting your crypto activities, the prospect of owing back taxes can be overwhelming.

The good news? If you’re facing a significant tax bill from past crypto trading, you have more options than you might think.

The Importance Of Taking Action Now

The key to managing potential crypto tax issues is being proactive. If you’ve received a collection letter from the IRS that you believe is incorrect, don’t ignore it — seek help from a qualified tax attorney immediately.

Crypto taxation can be complex, and having professional guidance can help you make a strong case for your position. Many tax controversies arise from legitimate disagreements about how tax law applies to specific crypto transactions, and a skilled tax attorney can help you navigate these waters.

 The right legal counsel can also help you negotiate with the IRS to reduce or avoid penalties through programs like voluntary disclosure or reasonable cause relief.

Remember, the IRS is more likely to be receptive to your arguments and willing to work with you if you come forward voluntarily rather than waiting for them to escalate collection efforts.

However, if after careful analysis you determine that you do indeed owe a significant tax bill that you can’t pay, don’t panic — several options exist to help you manage this situation.

IRS Payment Plans And Installment Agreements

If you can make regular payments but can’t pay your full tax debt immediately, an installment agreement might be your best option to settle your tax debt. The IRS offers several types of payment plans:

• Short-term payment plans allow you to pay within 180 days and typically don’t incur setup fees.
• Long-term payment plans, lasting longer than 180 days, require setup fees but make larger tax debts manageable through monthly payments.
• Partial pay installment agreements are for taxpayers who have some ability to pay but can’t pay in full before their tax liability expires (typically 10 years).

For crypto investors owing less than $50,000 in combined tax, penalties, and interest, applying for a payment plan online should be straightforward. You’ll generally be able to request an installment agreement in your online account and receive an approval if you’ve filed all required returns.

For larger amounts, and partial pay installment agreements, you’ll need to provide detailed financial information through Form 433 series, submit the taxpayer financial statement with supporting documents.

The IRS will scrutinize each monthly expense category and sometimes request supporting documents for proof of payments, compare the reported income against previous tax returns, and the taxpayers must know the IRS allowable expenses for each category.

Even if the initial examiner temporarily approves the proposed installment agreement, managerial approval may take a long time when it is supposed to be determined within 14 days.

Taxpayers often find themselves repeating the same process multiple times as they do not hear from the IRS while penalties and interest continue to accrue while waiting.

Even if the IRS approves, they will file Notice of Federal Tax Lien against the taxpayers’ assets if the outstanding balance exceeds $50,000.

Offer In Compromise

Offer in Compromise (OIC) programs allow taxpayers to settle their tax debt for less than the full amount owed.

In most cases, the IRS will approve an OIC if the agency believes that the amount of your settlement offer is the most the IRS expects it can collect from you during the collection period.

For crypto investors, the IRS will scrutinize your trading history, remaining holdings, and potential for future gains. If you’ve retained any significant crypto positions, you’ll likely need to liquidate them before an OIC would be considered.

Currently Not Collectible Status

One lesser-known option for crypto investors facing insurmountable tax debt is Currently Not Collectible (CNC) status.

This designation means the IRS temporarily halts collection actions because paying the tax debt would create severe financial hardship.

 To qualify for CNC status, you’ll need to demonstrate that paying your taxes would leave you unable to meet basic living expenses.

CNC classification requires a detailed Collection Information Statement, just like an Offer in Compromise, and supporting documents for requested expense items must be turned in by deadlines for consideration. Managerial approval is supposed to take about 14 days but typically it takes much longer. And oftentimes the financial submission process should be repeated for no reason at all.

While CNC status doesn’t eliminate your tax debt — interest and penalties continue to accrue — it provides breathing room to stabilize your financial situation.

Hiring a competent tax professional to apply for CNC classification is recommended because taxpayers’ self-completed financial forms may have many expense categories above the IRS allowable standard, and incorrectly filled-out expenses are harder to be corrected by a representative at a later time.

The Critical Importance Of Filing Returns

Perhaps the most crucial advice for crypto investors facing tax debt: Always file your returns on time, even if you can’t pay the full amount owed.

The penalties for not filing (up to 5% of unpaid taxes per month) are 10 times higher than the penalties for not paying (0.5% per month).

 Filing your returns also starts the clock on the Collection Statute Expiration Date  (CSED) and demonstrates good faith compliance, which is a prerequisite to negotiating payment arrangements.

Additionally, unfiled returns can prevent you from qualifying for payment plans or other relief options.

Taking Action On Crypto Tax Debt

If you’re struggling with crypto-related tax debt:

1. Gather complete records of your trading history, current holdings, and financial situation.
2. Consult tax attorney Sammy Kim, who is familiar with both crypto taxation and IRS collection alternatives.
3. Ensure that you (or your attorney on your behalf) contact the IRS proactively — they’re generally more flexible when taxpayers take the initiative.
4. Apply for the most appropriate payment option based on your circumstances.

Remember, the IRS’s primary goal is to collect taxes, not to punish taxpayers. They would rather work out a realistic payment plan than force taxpayers into financial hardship.

By understanding your options and taking proactive steps, you can address your tax debt while maintaining your financial stability.

Frequently Asked Questions About Crypto Tax Debt

If I received a CP2000 notice about unreported crypto gains, should I just pay the amount shown?

Not necessarily. CP2000 notices for crypto transactions often contain errors because the IRS may not have complete basis information or might misinterpret the nature of certain transactions.

Have a tax professional review your actual trading history against the notice before agreeing to pay. You may owe less than the notice suggests, or in some cases, nothing at all.

Will the IRS accept my own records of crypto losses if I didn’t report them in previous years?

Yes, but these records must be credible and verifiable. If you can provide complete and accurate records showing your trading history, the IRS will generally consider these losses when calculating your tax liability.

Exchange statements, blockchain explorers, and crypto tax software reports can all help substantiate your position.

Can I keep trading crypto while I’m on an IRS payment plan?

Yes, you can continue trading crypto while on a payment plan, but proceed with caution. You must stay current on all new tax obligations while making payments on past debt. Missing estimated tax payments on new trades could default your payment agreement.