Got an IRS Letter About Crypto After Trading Prediction Markets? What to Do

If the IRS writes to you about crypto after you traded prediction markets, read the notice number first and answer by the date on it. The most common kind is a CP2000, which proposes changes because a form sent to the IRS doesn't match your return. It is not a bill, and it can be wrong, especially if a 1099-DA reported your proceeds without your cost basis. Ignoring it is the one response that reliably makes it worse.

OddsFile is software, not tax advice. The IRS has not issued guidance on how prediction-market contracts are taxed. This article explains the options and the sources behind them; a tax professional can tell you which position fits your situation.

First, check that it's real

The IRS digital assets page warns about a specific scam: letters with QR codes asking you to register cryptocurrency on a "compliance portal." The IRS says to ignore them, and that it doesn't require registration of digital assets. Don't scan codes or click links from a letter. Go to IRS.gov yourself, or check your IRS online account, which shows many notices.

Which letter do you have?

We could not find official IRS material on whether the 6173 and 6174 series is still being sent, so treat any such letter as its own instruction. At the time, advisers such as RSM read Letter 6173 as the one demanding a response, and 6174 as educational.

What the IRS can actually match

CP2000s are generated from forms that third parties file. So ask which form triggered it. For prediction-market traders, the usual candidates are:

• Form 1099-DA from an exchange where you sold crypto, or from Kalshi's crypto partner ZeroHash, as Kalshi describes it.
• Form 1099-B, 1099-MISC or 1099-INT from Kalshi or another venue.

Robinhood says it doesn't report event contract trades to the IRS, and the international Polymarket exchange doesn't send 1099s. That doesn't mean the income is not reportable. It means a mismatch letter is more likely to be about the crypto around your trading than the trades themselves.

The classic false alarm: proceeds with no basis

Form 1099-DA reports gross proceeds for transactions from January 1, 2025, and basis only for certain transactions from January 1, 2026. So a 2025 form can show that you sold $40,000 of USDC or ETH with no cost next to it.

If you didn't report that sale on Form 8949, the IRS system may treat a large part of the $40,000 as income. Your real gain could be close to zero, especially on a stablecoin. The fix is to show the basis, not to pay the proposed amount.

More on how those forms work in 1099-DA explained for Polymarket and Hyperliquid users.

How to answer a CP2000

The IRS instructions boil down to this:

1. Compare line by line. Identify each item the IRS says is missing.
2. Decide: agree, or disagree in part. The notice has a response form. Complete and sign it, state your position and attach support.
3. Send it by the date listed. You can use the IRS document upload tool with the access code on your notice, fax, or mail. If you need more time, you can ask for an extension using a reply option.
4. Attach evidence. For a basis dispute, send a completed Form 8949 and the records behind it: purchase records, wallet transfers, and a short explanation of how the funds moved.

Don't file a separate amended return if you simply agree and have nothing else to add. The IRS says you don't need to. If the notice is correct but you have other items to report, complete Form 1040-X, write "CP2000" on top and send it with your response form.

If you don't reply, the IRS says it may send another notice and a bill.

What if the letter reveals a real omission?

Maybe the notice is about a small crypto sale, but rebuilding your year shows Polymarket gains you never reported. Talk to a preparer before you respond. Contact from the IRS can affect whether a later amended return counts as a qualified amended return, as explained in how to fix unreported prediction market income. Don't give a partial answer that you know leaves something out.

Records to gather now

• Every 1099 you received for the year, including small ones
• Exchange statements showing what you bought and when
• Wallet addresses you own, so transfers can be shown as transfers
• Per-market results, fees and resolution dates
• A note of the tax treatment you used and why

For Polymarket and Hyperliquid, run the free OddsFile check: paste an address and see your 2025 or 2026 P&L, no signup. It gives you a starting point for reconciling what you reported with what happened on-chain.

FAQ

Is a CP2000 an audit?

The IRS calls it a notice that isn't a bill. It is a proposed adjustment based on third-party information. Your reply decides what happens next.

The form lists USDC. Why would a stablecoin cause a letter?

Stablecoins are digital assets, so selling them is reportable. A form showing proceeds without basis can look like income until you show what you paid.

Could the IRS send a letter about Polymarket specifically?

We know of no IRS letter program aimed at prediction markets. That is an absence of public information, not a promise. Respond to whatever the notice actually says.

Should I hire someone?

For a simple basis mismatch, many people can respond alone. For an audit letter, multiple years or real omissions, professional help is worth it.