Crypto disputes are evidence disputes. What did you pay? When did you acquire it? Was that transfer a sale or a move between your own wallets? Who has to prove the answer decides a lot of cases.

The default rule favors the IRS. But the Code carves out important exceptions, and they matter most in exactly the situations crypto taxpayers face.

The default: the taxpayer bears the burden

Tax Court Rule 142(a)(1) says the burden of proof is on the petitioner, the taxpayer, except as otherwise provided by statute or determined by the court. The exception in the same rule: for new matter, increases in deficiency, and affirmative defenses pleaded in the IRS’s answer, the burden is on the IRS.

In a crypto case, that means if the IRS disallowed your basis, you generally have to prove it. If it treated a transfer as a sale, you generally have to show it was not.

That default connects to a recordkeeping duty. IRC 6001 says every person liable for tax shall keep such records as the IRS may prescribe. In crypto, those records are exchange histories, wallet records, and the documents behind your basis.

Shifting the burden: IRC 7491(a)

IRC 7491(a)(1) says that if, in any court proceeding, a taxpayer introduces credible evidence on any factual issue relevant to the taxpayer’s income tax liability, the IRS has the burden of proof on that issue.

But 7491(a)(2) attaches conditions. The shift applies only if the taxpayer:

  • complied with the Code’s requirements to substantiate any item;
  • maintained all records required under the Code; and
  • cooperated with reasonable IRS requests for witnesses, information, documents, meetings and interviews.

For partnerships, corporations and trusts, 7491(a)(2)(C) adds a further requirement tied to IRC 7430(c)(4)(A)(ii). And under 7491(a)(3), the shift does not apply where another Code provision sets a specific burden.

Notice the third condition. How you behaved in the audit can decide who carries the burden at trial. A taxpayer who ignored Information Document Requests or refused meetings may lose the ability to shift the burden later, even with good evidence.

What carries weight on crypto facts

Whoever carries the burden, crypto facts are proved with documents. The ones that tend to persuade examiners, Appeals officers and judges are the ones created at the time by someone other than you.

  • Exchange records showing trades, deposits, withdrawals and fees.
  • Bank and card statements showing dollars going to and coming from exchanges.
  • On-chain records tying a withdrawal from one platform to a deposit at another, which proves a transfer was not a sale.
  • Information returns such as Forms 1099-DA, together with your reconciliation to them.
  • Contemporaneous notes or spreadsheets you kept as you traded.

Reconstructions built after the fact are not worthless, but they persuade only when the method is explained and the inputs are documented. See rebuilding missing cost basis.

A basis dispute, start to finish

Suppose the IRS disallows all basis on coins you transferred to an exchange and sold, because the 1099-DA showed none. In Tax Court, Rule 142(a) puts the burden on you to prove basis.

You produce bank statements showing the original purchases, the original exchange’s records, and the on-chain transfer into the new exchange. You kept those records and produced them during the audit when asked. That is credible evidence, and you met the substantiation, recordkeeping and cooperation conditions, so under IRC 7491(a) the burden on that factual issue may shift to the IRS.

Now change one fact: you refused the examiner’s requests and produced the records for the first time at trial. The evidence may still be credible, but the cooperation condition in 7491(a)(2)(B) is in doubt, and with it the burden shift. Same documents, worse position.

That is the practical lesson of 7491. The burden-shifting rule rewards the taxpayer who did the work early. It does very little for the taxpayer who saved the work for the courtroom.

Burden and the statute of limitations

Burden questions also come up when the IRS relies on an extended assessment period. If the IRS asserts that a year is open because of fraud under IRC 6501(c)(1), it is relying on fraud, and the burden rules for fraud in IRC 7454(a) and Rule 142(b) come with it. If it relies on the six-year rule for a substantial omission, the size of the omission relative to the gross income stated on the return becomes a factual issue with its own proof. See how far back the IRS can audit crypto.

Statistical reconstructions: IRC 7491(b)

IRC 7491(b) says that for an individual, the IRS has the burden of proof in any court proceeding on any item of income it reconstructed solely through the use of statistical information on unrelated taxpayers.

Most crypto adjustments are not statistical. They come from information returns, exchange records and blockchain data about your own activity. But if an IRS income figure rests only on averages about other people, this provision matters.

Penalties: IRC 7491(c)

IRC 7491(c): “Notwithstanding any other provision of this title, the Secretary shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title.”

Burden of production means the IRS must come forward with evidence that the penalty applies. For penalties subject to IRC 6751(b), that includes evidence of timely written supervisory approval. Once the IRS meets its burden of production, defenses such as reasonable cause are generally for the taxpayer to prove. See supervisory approval of crypto penalties and the reasonable cause defense.

Fraud: IRC 7454(a) and Rule 142(b)

IRC 7454(a) puts the burden on the IRS in any proceeding involving whether the petitioner has been guilty of fraud with intent to evade tax. Tax Court Rule 142(b) says the burden must be carried by clear and convincing evidence.

That is the highest civil standard in tax litigation, and it applies to the 75 percent civil fraud penalty under IRC 6663, to the fraudulent failure to file addition under IRC 6651(f), and to the unlimited statute for fraudulent returns under IRC 6501(c)(1). See the civil fraud penalty.

But remember IRC 6663(b). Once the IRS proves any portion of an underpayment is due to fraud, the entire underpayment is treated as fraudulent, except portions the taxpayer proves by a preponderance are not.

What this means during the audit

Burden rules are applied in court, but they should shape the audit from day one.

  • Keep and produce records. You need them to prove your basis, and you need to have maintained them to shift the burden under 7491(a).
  • Cooperate with reasonable requests. Not because the examiner is your friend, but because cooperation is a condition of the 7491(a) shift.
  • Document your reasonable cause story as you go. If the IRS meets its burden of production on a penalty, you will need evidence of reasonable cause and good faith.
  • Track the IRS’s penalty process. Ask for approval documentation, so you know whether the IRS can meet its burden of production.
  • On fraud, make the IRS prove it. Do not concede intent through casual statements in interviews.

The bottom line

In most crypto disputes, you will need to prove your numbers. The best way to do that is to have the records, produce them, and cooperate, which also keeps open your chance to shift the burden. On penalties and fraud, the IRS has burdens of its own. Hold it to them.

If your case is headed toward court, see the crypto notice of deficiency for the deadlines that control how you get there.