Before any digital-asset-specific form existed, several exchanges reported customer activity on Form 1099-K, a form built for payment processing. It reports gross transaction volume, not gains.
The IRS matching system compared that gross figure against what taxpayers had put on their returns, found a discrepancy, and issued CP2000 notices proposing additional tax.
Thousands of people who had reported correctly received notices proposing liabilities based on volume rather than gain. Somebody who traded the same $5,000 twenty times has $100,000 of volume and possibly no gain at all, and the notice was calculated on the $100,000.
Resolving one meant producing records: acquisition dates, amounts, basis, the actual character of the activity. Enough of it reached the Tax Court that the court pushed back on the agency's handling, and exchanges moved away from the form.
Now read what was wrong, because the useful part is that almost nothing was.
The taxpayers had done nothing wrong. The exchanges had filed a form they were arguably required to file. And the notices were correct on their own terms, because a matching system compares two numbers and has no view of anything else.
The people who resolved them quickly were the ones who could produce a reconciliation on request. The people who could not spent months and money establishing something that had been true the whole time.
This is the direct precedent for the course autopsy, and the form has changed while the mechanism has not.
United States federal only, education rather than advice. If you actually receive a notice, take it to a qualified preparer, not to this lesson.
Matching is not judgment
The mechanism worth understanding is duller and more consequential than most people assume.
Third parties report information about you. An automated system compares those reports against your return. Where the numbers do not line up, it proposes an adjustment.
There is no view of context anywhere in that loop. It does not know your basis, that a transfer was between your own wallets, or that a number is gross rather than net. It knows two figures and whether they agree.
Which produces the fact that governs this entire lesson: a completely correct return can generate a notice, and the notice is not an accusation. It is a request for the reconciliation the system cannot perform.
Your job is therefore not to be right. It is to be right and able to demonstrate it on request, years later.
Three ways the form disagrees with reality
1. Missing basis on uncovered assets. F108-02's distinction. Anything acquired before 2026, or acquired elsewhere and transferred in, is uncovered, so the form reports proceeds and no basis. The course autopsy is this: $180,000 of proceeds, no basis, and a matching system that reads the absence as zero.
This is the form working exactly as designed. It is not an error and there is nobody to complain to.
2. Transfers misread. You move assets between your own wallets, which F108-01 established is not a disposal. Depending on what the broker can see and how it classifies the movement, this can appear in reporting in ways that do not correspond to anything taxable.
3. The broker's basis is simply wrong. For covered assets the broker calculates basis from what it observed. That calculation can be incomplete or incorrect, particularly around fees, transfers and corporate-action-like events. This is the only one of the three that is an actual error, and you will only detect it if you have your own number to compare.
What the form cannot know
Worth stating plainly, because people assume the reporting is more complete than it is.
A broker knows what happened in that account. It does not know:
- What you paid for something you acquired elsewhere
- Whether an outbound transfer went to your own wallet or to a buyer
- What anything was worth when you received it on-chain
- What you did on a decentralised venue
- Anything at all about your self-custody activity
This is the honest tension at the centre of the Freshman level and it deserves naming.
F104-02 tells you to buy at a broker, withdraw to self-custody, and hold in a vault that connects to nothing. That is correct security advice and this course stands by it.
It also means that when you eventually sell, the assets arrive back at a broker as uncovered, and the form reports proceeds against no basis. The safest possible custody pattern produces the exact reporting artefact that generates a notice.
Nothing about this is a reason to hold at an exchange instead. It is a reason to build the record habit at the same moment you build the wallet architecture, because the two are the same project and only one of them feels urgent at the time.
Responding to a proposed adjustment
Four things, in order, and the first is the one people get wrong.
Do not ignore it. These have deadlines and the proposed amount becomes the assessed amount if nothing happens.
Do not argue. An explanation of why the form is misleading, unaccompanied by documents, is not responsive. The system already knows the two numbers; what it lacks is the third.
Produce a reconciliation. Acquisition dates, amounts paid, the basis of the disposed lots, and where the assets came from. This is the artefact F108-L asks you to build, and having built it once is what turns a multi-month problem into a letter.
Get help if the amount is meaningful. A qualified preparer or a tax attorney. The cost is a fraction of the proposed adjustment and the process has rules you do not know.
What to do before any of this happens
The whole lesson compresses into a habit, and the habit belongs to F108-04.
Reconcile every year, while the year is fresh. Export the broker's data, export the wallet history, compare the two, and resolve the differences while you still remember what a transaction was.
Keep the reconciliation, not just the raw data. The document that says "these proceeds correspond to these acquisitions, at these prices, from these sources" is the thing you will be asked for. It ages well and raw exports do not.
Expect the tooling to be wrong somewhere. F108-L makes you find at least one transaction the software classified incorrectly, because it always does, and knowing that in advance is the difference between trusting an export and checking one.
If the form is wrong, that is the broker's problem to fix.
Partly, and the split is not where people expect.
A broker that has genuinely made an error can issue a corrected form, and asking is a reasonable first step for the third category above.
The first two categories are not errors. A form reporting proceeds without basis on an uncovered asset is the form doing what the rules require, and no correction will be issued because nothing is wrong with it. There is nothing to fix at the broker's end.
And the timing does not work either way. Notices arrive well after the fact, brokers are slow, and some of them no longer exist by then, which F107-04 covers. Meanwhile the deadline on the notice is yours.
The durable position is the one this whole course is built toward: the reporting is an input you reconcile against, not an authority you rely on. Being able to prove your own numbers is the only part of this that is entirely within your control, and it is the part that resolved the 1099-K notices in weeks rather than months.
Document matching compares two numbers and has no view of anything else, so a correct return can produce a notice and the notice is a request for a reconciliation rather than an accusation. A 1099-DA can disagree with reality in three ways: missing basis on uncovered assets and misread transfers, both of which are the system working as designed, and a wrong broker calculation, which you will only catch if you have your own number. Good custody produces exactly the pattern that gets flagged, because assets moved to self-custody come back uncovered. So respond with evidence rather than argument, and build the reconciliation each year while you still remember what the transactions were.