Issues

Cost Basis: How To Fight a 1099-B or Crypto Gain in Tax Court

The IRS taxed your whole stock or crypto sale as gain because the basis box was blank. Here's how to prove your cost basis and cut the gain in Tax Court.

You sold some stock. Or a mutual fund, a bond, or some crypto. The broker reported the sale to the IRS, and now a Notice of Deficiency says you owe tax on the entire sale price—as if every dollar you received was pure profit. It isn't. You paid for that investment. The number the broker reported is what you got, not what you made. Nobody reported what you paid.

That gap is the whole fight. The broker's Form 1099-B (for securities) or the new Form 1099-DA (for crypto) reports your gross proceeds—the total you received—and very often leaves the basis box blank. Basis is your investment in the property, normally what you paid for it. When the basis box is empty and you don't supply the number yourself, the IRS computes your gain as if your basis were zero. So a $40,000 sale becomes $40,000 of gain, taxed at the highest rate, when your real gain might be $6,000 or nothing at all.

This bites even if you actually lost money: a basis of zero turns a real loss into a full gain on paper, so proving basis is how you show the true loss—or at least kill the phantom gain. And if you reinvested dividends for years, your real basis is far higher than what you first paid, and the zero-basis number ignores every reinvestment—a very common reason you owe much less than the notice says.

One reassurance before anything else: the Tax Court is a prepayment forum. That means you do not have to pay the disputed bill first to fight it. A timely petition stops the IRS from assessing and collecting while a judge hears your case. You get to make your basis case before you pay.

This is the substantive merits guide to winning that fight—proving your cost basis (and your holding period) to cut the gain down to what is real. It is the deep companion to Unreported Income Disputes in Tax Court, which owns the general 1099-matching machinery and the burden-of-proof framework across every kind of unreported income. Cost basis gets its own dedicated guide because proving it is a discipline of its own—and because crypto basis just got dramatically more complicated with the arrival of Form 1099-DA for 2025 sales.

Which notice are you holding? Two very different documents bring people here. A CP2000 is an automated proposed change—the IRS's computer matched a 1099-B or 1099-DA you didn't fully report and is proposing extra tax. No Tax Court clock has started, and you can still head it off. A Notice of Deficiency—the "90-day letter"—is the IRS's formal determination, and it starts your 90 days deadline to petition Tax Court. Figure out which one is in your hands first, because it sets both your deadline and your options.

The Equation That Decides Everything

Every one of these disputes lives inside a single equation. Once you see it, the whole case clicks into place.

Under IRC § 1001, your gain on a sale is the amount realized minus your adjusted basis. The amount realized is what you received—cash plus the value of any property you got in return. Your adjusted basis is your investment in the property. IRC § 1011 defines adjusted basis as your basis—usually cost—as adjusted under IRC § 1016. And IRC § 1012 states the starting rule in five words: "The basis of property shall be the cost of such property."

Here is what that means for you. The gross-proceeds number on your 1099-B or 1099-DA is only the amount realized—the left half of the equation. It is your job to supply the adjusted basis—the right half. The broker reported the proceeds, not the profit. Your entire merits case is proving the basis that turns proceeds into your real, much smaller, gain.

When basis is missing, the IRS doesn't guess in your favor. It uses zero. With a basis of zero, your gain equals the full proceeds. That is not a clerical error you can point out; it is the default the law leaves in place until you prove a number. Proving basis is the entire merits fight.

Basis also moves up and down over time, which is why "what I paid" is sometimes the wrong starting number. Under § 1016, basis increases for things like reinvested dividends and capital improvements, and decreases for things like depreciation and returns of capital. For an investor, the most common upward adjustment is a reinvested dividend—every reinvestment is effectively a new purchase that adds to your basis.

Holding Period and the Short-Versus-Long-Term Sting

There is a second number hiding in the same form: your holding period—how long you owned the asset before you sold it. It controls your rate, and the rate swing is enormous.

Under IRC § 1222, a gain is long-term if you held the asset more than one year, and short-term if you held it a year or less. Long-term gains get the favorable capital-gains rates—0%, 15%, or 20% depending on income. Short-term gains are taxed at your ordinary income rates, which run up to 37%.

The $0-basis trap usually drags the holding period down with it. When a sale goes unreported, the IRS often has no acquisition date on file, so its reconstruction treats the lot as short-term—the worst rate. Establishing when you acquired the asset can re-characterize the gain as long-term and cut the rate by more than half, even before you touch the basis number.

Two holding-period rules will matter later in this guide. Under IRC § 1223, a gift recipient tacks on the donor's holding period, and property acquired from someone who died is automatically treated as long-term—even if you sell it the next day. Hold those two facts; they are basis-fight gold.

Why the IRS Used a Basis of Zero: Covered vs. Noncovered Securities

If your 1099-B has a blank basis box, you are probably looking at a noncovered security. Understanding that one piece of jargon explains most securities-basis disputes.

Brokers have to report your sales to the IRS under IRC § 6045. But the requirement to report your basis—not just your proceeds—phased in gradually, by type of security:

Stocks acquired in 2011 or later
Mutual funds and dividend-reinvestment (DRIP) shares acquired in 2012 or later
Bonds, options, and other debt instruments acquired in 2014 or later

A covered security is one the broker must report basis on. For a covered security, the broker fills in Box 1e of your 1099-B with the basis, and the IRS sees it. A noncovered security is everything else—and for a noncovered lot (a lot is a single batch of shares or units you bought at one time and price), the broker reports your proceeds but not your basis to the IRS, even if it prints a basis figure on your own copy as a courtesy. Box 5 of the 1099-B is checked when the lot sold was noncovered.

So which of your lots are noncovered? The ones most likely to land you in a dispute:

Old lots bought before the phase-in dates above
Inherited or gifted shares, where you never made a purchase
Shares transferred in from another broker, where the basis history may not have followed cleanly

On Form 8949—the form where capital sales are detailed before they roll up to Schedule D—covered lots go in Box A (short-term) or Box D (long-term). Noncovered lots go in Box B (short-term) or Box E (long-term), the boxes labeled "basis not reported to the IRS." For those Box B and Box E lots, you must supply the correct basis in column (e). Leave it blank, or skip the sale entirely, and the IRS computes your gain on the full proceeds with a basis of zero. That single mechanic is the most common securities-basis fight there is.

A covered lot can be wrong too. Even when the broker fills in Box 1e, the reported basis can be too low—after an account transfer that didn't carry the full history, a missed dividend reinvestment, or a corporate action the broker never applied. When the reported basis is wrong, you don't just overwrite Box 1e: you report the broker's figure, then fix it on Form 8949 with a code-B adjustment in column (f) and the correction in column (g), backed by your own records.

The Burden Is on You—But It Has a Limit

The starting position is against you. Under Tax Court Rule 142(a) and Welch v. Helvering, 290 U.S. 111 (1933), the IRS's determination carries a "presumption of correctness, and the petitioner has the burden of proving it to be wrong." In a basis dispute, that means you prove your basis. The IRS does not have to prove it is zero; you have to prove it is more.

But that burden has a lever you can pull. IRC § 6201(d) says that when you "assert a reasonable dispute" about an item on a third-party information return—like a 1099-B or 1099-DA—and you "have fully cooperated" with the IRS, the burden shifts: the IRS "shall have the burden of producing reasonable and probative information concerning such deficiency in addition to such information return." In plain terms, a bare 1099-B is not self-proving. Once you reasonably dispute the figure and cooperate, the IRS has to come forward with more than the bare form.

Two things must be true to trigger it. Reasonable dispute: you have to articulate why the number is wrong—the basis box was blank, the proceeds were misreported, the lot was noncovered, the acquisition date is missing. A flat denial is not enough. Full cooperation: you have to respond to IRS requests and not stonewall. Build both from your very first CP2000 response forward, and name § 6201(d) in your petition.

IRC § 7491 adds two more shifts: subsection (a) moves the burden to the IRS on factual issues if you introduce credible evidence and met your recordkeeping and cooperation duties, and subsection (c) puts the burden of production on the IRS for any penalty it asserts.

Proving and Reconstructing Your Basis (Securities)

This is the work. If you can document what you paid, you win the number. Here is what counts as proof, anchored to Publication 550 (investment income) and Publication 551 (basis of assets).

Brokerage records. Trade confirmations, monthly and annual statements, and year-end gain/loss reports are your front-line evidence. Even for noncovered lots, many brokers track basis on your customer copy—it just wasn't reported to the IRS. Pull the original buy confirmation if you can; it shows the date, the share count, and the price you paid.

ACATS transfer statements. When you move an account from one broker to another, the transfer runs through a system called ACATS (the Automated Customer Account Transfer Service). Under the transfer-reporting rules, the delivering broker is supposed to pass the basis to the receiving broker. If a lot became noncovered because it was transferred in, the receiving broker's transfer statement—or the original broker's records—often still carries the basis. Ask the receiving broker for the transfer statement.

DRIP and reinvested-dividend records. This one is worth real money. Every reinvested dividend is a purchase that adds to your basis under § 1016. A stock or fund you have held for twenty years through automatic dividend reinvestment has a basis far above your original investment—sometimes double or more. If the IRS is using your original purchase price (or zero), and you reinvested dividends the whole time, you are being over-taxed. Reconstruct it from your dividend statements and your old 1099-DIV forms.

Historical price data. For a lost lot with a known acquisition date, the closing price on that date multiplied by your share count reconstructs the cost. For inherited lots, the price on the date of death sets the basis (more on that below). Financial-data sites and the company's own investor-relations history can supply the price.

Corporate actions. Stock splits, spinoffs, mergers, and return-of-capital distributions all change basis. A 2-for-1 split doesn't change your total basis—it just spreads the same dollars across twice as many shares, halving the basis per share. A spinoff splits your original basis between the old company and the new one. Companies publish basis-allocation guidance for these events, and they file Form 8937 with the IRS documenting the math. If your shares went through any corporate action, that paperwork tells you how to adjust.

Which Lots Did You Sell? The Method Changes the Gain

When you bought the same stock or fund at different times and prices and then sold only some of it, which lots you sold determines the gain. There are three methods, set by Treasury Regulation § 1.1012-1:

Specific identification. You pick the exact lots sold—usually the highest-basis lots, to minimize the gain. This requires you to identify the lots at or before the time of sale. Done right, it is the most powerful tool you have.
FIFO (first in, first out). The default when you don't specifically identify. It sells your oldest lots first—usually the lowest-basis lots in an asset that went up—which produces the highest gain.
Average cost. Available for mutual fund and DRIP shares under § 1012(d). It blends the basis across the account. It is not available for individual stocks or for crypto.

Why this matters in a dispute: if the IRS reconstructed your gain using FIFO (or zero) but you actually held higher-basis lots you could have specifically identified, your real gain can be materially lower. For noncovered lots, you choose the method on your own records—but you have to apply it consistently and back it with contemporaneous documentation.

Inherited and Gifted Assets: Your Best Basis Position

Here is a fact that surprises almost everyone: "I inherited it" or "it was a gift" is not a zero-basis situation. It is often the most favorable basis position you can have. You just have to claim it affirmatively—the IRS won't apply it for you.

Inherited Property: The § 1014 Step-Up

When you inherit property, your basis is not what the person who died originally paid. Under IRC § 1014, your basis is the fair market value (FMV) on the date of death—the property's worth on the day you inherited it. (If the estate elected the alternate valuation date, it is the FMV six months later.) This is usually a step-up: decades of the decedent's gain simply vanish, and your basis resets to the date-of-death value.

The effect is dramatic. Say your father bought a stock for $5,000 in 1985, it was worth $80,000 the day he died, and you sold it for $82,000. Your basis is $80,000, not $5,000. Your gain is $2,000—not $77,000. The step-up wiped out a lifetime of appreciation.

Two bonuses come with it. First, the holding period is automatically long-term under § 1223—even if you sell the day after you inherit, you get the favorable long-term rate. Second, the same rule applies to crypto: a digital asset acquired from someone who died takes date-of-death FMV.

Jointly owned assets and assets inherited from a spouse have their own step-up rules—usually a partial step-up on the deceased owner's half in most states, but sometimes a full step-up on the whole asset in community-property states. If your asset was jointly held or came from a spouse, the math gets fact-specific fast, and it is worth pointing a complex case to a tax professional or a Low Income Taxpayer Clinic.

Evidence: the estate's date-of-death valuation, an appraisal, or—for publicly traded securities—the closing price on the date of death (Pub. 551 uses the average of the high and low trading prices that day). Your brokerage may also have issued a stepped-up basis statement when the account transferred.

Gifted Property: The § 1015 Carryover (and a Trap)

A gift works differently. Under IRC § 1015, your basis in gifted property is generally the donor's adjusted basis—it carries over from the person who gave it to you. The holding period tacks on too, so you inherit the donor's clock as well as the donor's basis.

There is one trap to know: the dual-basis rule. If the property's FMV at the time of the gift was lower than the donor's basis, then for computing a loss, your basis is the lower gift-date FMV—not the donor's higher basis. This stops people from shifting a built-in loss by gifting it. The practical result: gain is measured from the donor's basis, loss is measured from the gift-date FMV, and a sale price between the two produces no gain and no loss.

Evidence: the donor's purchase records and brokerage statements, and a Form 709 gift-tax return if one was filed.

The reader takeaway for both: if you "didn't pay anything" because you inherited or were given the asset, you almost certainly have real basis—often basis high enough to erase most of the gain. You have to establish it.

Crypto Cost Basis and the New Form 1099-DA

Crypto has its own version of the same problem, and 2025 is the year it got real, because brokers started reporting it.

Start with the bedrock rule. Since Notice 2014-21, the IRS has treated virtual currency as property, not currency: "For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency." That guidance means crypto basis works just like stock basis—§§ 1001, 1011, and 1012 all apply, the same gain equation governs, and the same burden falls on you.

Because it is property, every disposition is a taxable event, not just cashing out to dollars:

Selling crypto for cash
Trading one crypto for another (a crypto-for-crypto swap is a taxable disposition at fair market value—your basis in the new coin becomes that FMV)
Using crypto to pay for goods or services
Paying a network or transfer fee in crypto

There is no like-kind exchange escape hatch—§ 1031 was limited to real property after 2017, so a crypto-for-crypto trade is fully taxable.

Form 1099-DA: What Just Changed

The Form 1099-DA is the crypto cousin of the 1099-B, and it is brand new. Under the 2024 final broker regulations (T.D. 10000), custodial crypto brokers—exchanges like Coinbase and Kraken—must report gross proceeds for digital-asset sales on or after January 1, 2025. The first forms arrive in early 2026.

Here is the catch that will drive disputes: basis reporting is voluntary for 2025. For 2025 sales, the 1099-DA shows your proceeds with no basis—a brand-new asset class arriving with the same blank-basis-box problem securities had for years. Basis reporting becomes mandatory for covered digital assets acquired after 2025 (reported starting in 2027). A covered digital asset is one acquired in 2026 or later in an account where the broker held it the whole time. Anything acquired earlier, or transferred in, is noncovered—proceeds reported, basis not.

So for a 2025 crypto sale, the form tells the IRS what you received and nothing about what you paid. If you don't supply your basis, you are right back in the zero-basis trap—this time on crypto.

One more change you need to read correctly. Congress repealed the so-called DeFi-broker reporting rule—H.J. Res. 25, Public Law 119-5, signed April 10, 2025. That means decentralized platforms and unhosted (self-custody) wallets—a Ledger, a Trezor, a non-custodial MetaMask—do not issue Forms 1099-DA. Be precise about this: the repeal killed the reporting for DeFi front-ends, not the tax. Every disposition is still taxable, and you still have to track your own basis. Custodial-exchange reporting under the separate 2024 regulations was not affected.

Tracking Basis Across Wallets: FIFO and the Safe Harbor

Crypto basis breaks down where coins move between wallets and exchanges. The defaults to know:

FIFO is the default. If you don't specifically identify which units you sold, the units are deemed sold in chronological order, oldest first—first in, first out.
Specific identification is available, but it requires contemporaneous records made no later than the time of disposition: the date and time acquired, the basis and FMV at acquisition, and the date, time, and FMV at disposition.

A major rule shift took effect at the start of 2025. Revenue Procedure 2024-28 provides a safe harbor for moving from a "universal" basis approach (one big pool across all your wallets) to a wallet-by-wallet approach. It lets you allocate your unused basis to the digital assets held in each wallet or account as of January 1, 2025—defined precisely as immediately after the close of December 31, 2024. If you held crypto across multiple wallets going into 2025, this allocation is how you assign basis correctly going forward, and doing it cleanly protects your basis numbers in a dispute.

Inherited and gifted crypto follow the same rules as stock: § 1014 date-of-death FMV for inherited coins, § 1015 carryover for gifts—both confirmed in Rev. Proc. 2024-28.

When the Exchange Is Gone: FTX, Celsius, Voyager

If you held crypto on an exchange that collapsed—FTX, Celsius, Voyager, BlockFi—you have a specific evidence problem. The portal is gone, the CSV export you needed is gone, and an IRS reconstruction built from third-party data can show inflated proceeds against a basis of zero. You rebuild the record from what survives:

Bank and card statements showing every dollar you deposited to buy crypto. These establish a basis floor—you clearly paid that money in—even when the exchange records are gone.
Blockchain explorers (Etherscan, Solscan, Mempool) for on-chain activity tied to wallet addresses you control. The blockchain is permanent even when the company isn't.
Claims-portal data from the bankruptcy trustee (often run through Kroll), which may reconstruct your account holdings.
Exchange CSV exports you saved earlier, and reputable tracking tools (CoinTracker, Koinly, CoinLedger) where they tie back to underlying records—a tool's summary is only as good as the source data behind it.

A Note on Form 8949 for Crypto

When you fill out Form 8949 for digital assets, the 2025 instructions use separate boxes from securities. Crypto goes in Boxes G, H, and I (short-term) and Boxes J, K, and L (long-term)—not the Box A through F you use for stocks. Use the right part of the form so your reporting matches the regime.

Be Honest About the Case Law

There is no clean Tax Court opinion squarely deciding a crypto cost-basis dispute on the merits. The marquee crypto cases are about other things—Jarrett is a staking-rewards timing case, and Harper is a Fourth Amendment summons fight over exchange records. Neither is a basis holding, and you should not rely on either as basis authority. Crypto basis disputes are resolved under the same general property-basis and burden-of-proof rules as securities: §§ 1001, 1011, 1012, Rule 142(a), Welch, and Cohan. There is no special crypto doctrine—which is good news, because it means the proof techniques in this guide apply directly.

Wash Sales: A Securities-Only Trap

If you sold a security at a loss and bought it right back, watch out for the wash-sale rule—and know that it does not apply to crypto.

Under IRC § 1091, if you sell stock or securities at a loss and acquire substantially identical stock or securities within the window 30 days before through 30 days after the sale (a 61-day window), the loss is disallowed. You don't get to deduct it that year. But the loss isn't gone forever: under § 1091(d), the disallowed loss is added to the basis of the replacement shares. You recover it when you sell the replacement lot. So a wash sale changes which year and how much basis applies—exactly the kind of adjustment that surfaces in a dispute. Brokers report wash-sale adjustments in Box 1g of the 1099-B for covered lots; for noncovered lots, you apply it yourself.

Crypto is different. Section 1091 applies to "stock or securities," and crypto is property, not a security—so the wash-sale rule does not currently apply to digital assets. As of now, you can sell crypto at a loss and rebuy it immediately without § 1091 disallowing the loss. Proposals to extend the rule to crypto have appeared, but none is enacted. This guide reports the enacted law only.

Can a Court Just Estimate Your Basis? The Cohan Question

You may have heard that a court can estimate a number when your records are imperfect. That is partly true, and it is worth understanding exactly—because the answer is "sometimes, with conditions," and getting it wrong loses cases.

The doctrine comes from Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930). It lets a court estimate an amount—including a basis—when the taxpayer clearly incurred a cost but lacks exact records. The court does so "bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making," but it can make an estimate rather than allow nothing.

Importantly, Cohan does reach basis, not just expenses. Where the manner of acquisition can't be pinned down, the Tax Court has used estimates—tending toward the lowest supportable basis when a gain is in dispute, and using floors like par value where it must. So a taxpayer who can credibly show they acquired the asset and paid something can sometimes get a basis above zero.

But—and this is the whole point—Cohan requires a rational evidentiary foundation. The court needs something to anchor the estimate to. With nothing, there is no estimate, and basis defaults to zero.

A recent case shows the hard edge. In Gyarmati v. Commissioner, T.C. Memo. 2026-27, a taxpayer who hadn't filed a 2015 return faced a deficiency on the sale of a Florida condo and tried to increase his basis with claimed improvements. The Tax Court refused to estimate the additional basis under Cohan, holding it was "unable to estimate additional capital improvements made to the condo, if any, under the Cohan rule because we have no reasonable basis for making such an estimate," citing Vanicek v. Commissioner, 85 T.C. 731 (1985) for the rule that there must be a rational basis for any estimate. The court found the taxpayer's testimony "vague, inconsistent, and oftentimes contradictory" and his documents not tied to the property. Result: basis held to the agreed amount, full gain taxed.

Two honest notes about Gyarmati. It was a real-property case, not stock or crypto—but the basis-proof rule it states applies to any asset. And the taxpayer there was represented by counsel, not pro se—so it is not a story about self-representation; it is the cleanest recent statement of how much proof a court needs before it will estimate basis at all.

The lesson is simple and you can act on it: records beat estimates every time; estimates beat nothing; nothing loses. A reader who can show acquisition plus some price—a confirmation, a bank withdrawal of a known amount, a historical price on a known date—gives the court the foundation it needs. A reader with only a bare assertion gets Gyarmati'd: zero basis and full gain.

(A related substantiation case, Sellers v. Commissioner, T.C. Memo. 2020-84, makes the same point from the other direction—a taxpayer who failed to substantiate his basis in passthrough entities lost the deductions. It is about entity basis, not securities, but the principle is identical: no basis records, no basis.)

What You're Really Facing: The Full Exposure Picture

A basis-dispute Notice of Deficiency is rarely just the tax on the gain. Build the whole picture so nothing blindsides you—and so you can see exactly how much proving basis is worth.

The deficiency itself. Tax on the gain the IRS computed—the full proceeds if it used zero basis—at the rate driven by your holding period. Remember the short-versus-long-term swing: short-term is ordinary rates (up to 37%); long-term is 0/15/20%. The zero-basis trap often defaults to short-term too, stacking the worst rate on the worst number.
The accuracy-related penalty—20%. IRC § 6662 adds a penalty of 20% of the underpayment for a substantial understatement (more than the greater of 10% of the tax or $5,000) or negligence. There are real defenses: reasonable cause and good faith under IRC § 6664(c), and the written-supervisory-approval requirement of IRC § 6751(b)—if the IRS can't produce timely approval, the penalty falls. Raise § 6751(b) in your petition; § 7491(c) puts the production burden on the IRS. See How To Fight the IRS Accuracy Penalty.
Interest. Interest runs on the deficiency from the original due date of the return and compounds daily. Unlike the penalty, it is not waivable for reasonable cause. See How Interest Works on Your IRS Tax Debt.
Net investment income tax—3.8%. A large reconstructed gain can push your income over the threshold for the IRC § 1411 net investment income tax (NIIT)—an extra 3.8% on investment income. The thresholds (modified adjusted gross income) are $200,000 single or head of household, $250,000 married filing jointly, and $125,000 married filing separately, and they are not inflation-indexed. The tax is 3.8% of the lesser of your net investment income or the amount your income exceeds the threshold, reported on Form 8960. At the 20% long-term bracket, NIIT pushes your effective rate to 23.8%.

A Worked Example

Suppose you sold an investment for $40,000 and didn't report the sale. The IRS treats the whole $40,000 as gain, defaults to short-term because it has no acquisition date, and taxes it at your ordinary rate—say 32%. That is about $12,800 of tax, plus a possible 20% accuracy penalty (about $2,560), plus interest.

Now you prove your basis. You bought the asset for $30,000 more than a year before you sold it, with confirmations to show it. Your real gain is $10,000, and because you held it over a year, it is long-term—taxed at 15%, about $1,500. The penalty shrinks with the tax, and the interest follows the smaller number.

That is the difference proving basis makes: roughly $12,800 down to $1,500—on the same sale. The proceeds never changed. Only the basis and the holding period did, and that was entirely your record-keeping to win.

How To Check the IRS's Math

Before you argue about your basis, pin down exactly what the IRS is using—because a basis of zero is often hiding inside a number that looks official. Every step here is something you can do yourself.

Read the CP2000 or Form 4549 line by line. A CP2000 shows the proposed change and lists the information returns it relied on. Form 4549—"Income Tax Examination Changes"—itemizes each adjustment and shows how the tax and penalty were computed. Identify exactly which sale lots the IRS counted and confirm whether it used a basis of zero. The most common reason a notice landed in your hands at all is that you omitted the sale from Schedule D entirely—so the IRS saw the broker's proceeds with nothing to subtract. Before anything else, confirm whether you reported the sale at all.

Pull your Wage & Income transcript. This is the single most useful document. It shows the actual 1099-B and 1099-DA the IRS received under your SSN—the proceeds, and the basis only if the broker reported it. This is how you confirm the IRS is working from a blank basis box, and how you catch a duplicate or a wrong-taxpayer form. You can pull it yourself through IRS.gov. See How To Get and Read Your IRS Transcripts.

Pull your Account transcript. This shows the assessment, the penalty codes, and your balance. It is also taxpayer-accessible. For the codes on it, see How To Read IRS Transcript Codes.

Reconcile lot by lot. Lay the transcript figures next to your broker statements and your return. For each sale, line up the proceeds (they should match) and supply the basis the IRS left at zero. A clean lot-by-lot schedule—date acquired, cost, date sold, proceeds, gain—is exactly what wins these cases, and exactly what triggers the § 6201(d) burden shift once you put it in front of the IRS.

You do not need a practitioner-only transcript for a basis reconciliation. The Wage & Income and Account transcripts—both of which you can pull yourself—carry everything you need.

What To Do Now

If a basis deficiency is in front of you, here is the sequence:

Identify the deadline on the notice. If it is a 90-day letter (Notice of Deficiency), you have 90 days to file in Tax Court (150 days if it was addressed outside the US). It cannot be extended.
Pull your Wage & Income transcript and confirm exactly which 1099-B or 1099-DA the IRS has under your SSN—and whether it shows any basis.
Read the CP2000 or Form 4549 to see how the IRS built its number, and confirm whether it used a basis of zero and a short-term rate.
Build your basis schedule. Gather confirmations, statements, ACATS transfer statements, DRIP records, date-of-death valuations for inherited lots, and donor records for gifts. Reconstruct what you can't find directly from historical prices and bank statements. Put it in a clean lot-by-lot schedule.
If the dispute is still at the proposed stage, it likely started as a CP2000 notice—respond there with your basis schedule and proof and head off the deficiency. If the deficiency is already assessed and you missed the Tax Court window, audit reconsideration is the fallback door. An amended return is not a substitute for a timely petition.
Decide whether to petition Tax Court. A timely petition preserves your prepayment forum; filing is $60, with a waiver available, and if your dispute is at or below $50,000 per tax year—as many single-year basis disputes are—you can elect small-case procedures. See How To File Your Tax Court Petition.
Expect to settle. Most (76%) of Tax Court cases close by formal settlement, and more than 99% close without a trial on the merits. The IRS routinely concedes basis once you put a documented schedule in front of it—so the case usually comes down to building the record, not arguing it to a judge. See How To Settle Your Tax Court Case.

One more thing to plan for: a change to your federal gain usually changes your state tax too, since most states pick up a federal adjustment automatically—so winning basis at the federal level can lower your state bill, and losing can raise it.

Around 89% of petitioners represent themselves, though the win rate trails represented petitioners (about 12% pro se versus about 23% represented in the most recent NTA data). A complex crypto reconstruction or a large deficiency is exactly the kind of case where help pays off—see When To Get Professional Help With Your Tax Dispute. And if your income is at or below 250% of the poverty line and your dispute is at or below $50,000, a Low Income Taxpayer Clinic may handle your Tax Court case for free.

Resources

Statutes and regulations:

IRS guidance, forms, and publications:

Companion articles on TaxCourtHelp:

Cases cited:

This article is for informational purposes only and does not constitute legal or tax advice. For advice specific to your situation, consult a qualified tax professional or attorney.