Crypto tax problems often start with a simple accounting failure: You cannot prove your cost basis. 

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Cost basis drives gain or loss. When you cannot substantiate basis, the IRS may treat your basis as zero, which can effectively treat the full proceeds as taxable gain. The IRS can also broaden the audit, and, in the wrong fact pattern, frame the issue as deliberate concealment rather than poor recordkeeping. The same dynamic can trigger California exposure because California taxes capital gains as ordinary income under its personal income tax rates, so it does not apply a preferential capital gains rate and can pursue civil enforcement and criminal tax investigations through its own channels.

Cost basis gaps happen more…