A crypto trader who is preparing a 2018-2022 Form 1040-X to correct basis, add omitted income, or reconcile against an exchange’s revised cost-basis figures is doing one piece of procedural work. If the original return for that year was filed late, or filed on time but with a payment shortfall, there may be a second piece of procedural work running on the same calendar: a **Form 843 protective claim under the Kwong COVID-disaster-postponement theory, with a hard filing window that closes on July 10, 2026**.
These are separate filing questions. A 1040-X corrects what was on the original return. A Form 843 protective claim targets penalties and interest the IRS assessed against that return. For most amenders, only the first question matters. For many 2018-2022 crypto traders, the penalty-relief question matters too because it runs on its own deadline. This piece explains when that overlap appears, what to check during amendment review, and where the Kwong filing fits into a 1040-X work product.
The two filings
Form 1040-X, income and basis correction. When a taxpayer files Form 1040-X to amend a return, the form is changing the substance of what was reported. For a crypto trader, the most common amendment fact patterns are:
- correcting cost basis where the exchange-supplied basis was wrong, missing, or computed under a method (HIFO, FIFO, specific-identification) different from what the taxpayer used to file
- adding realization events the original return omitted, token-to-token swaps, NFT mints, DeFi disposals, liquidity-pool transactions, hard-fork airdrops, staking rewards
- adjusting character (ordinary vs capital) where the original return treated mining or staking income incorrectly
- reconciling against a Form 1099-DA (issued for 2025 tax years and forward under T.D. 10000 / IRC § 6045)
The 1040-X’s job is to make the return accurate. It does not, by itself, address whether the IRS computed the original return’s penalties correctly.
Form 843 protective claim, penalty and interest relief. When a return was filed late, or filed on time but with an underpayment that triggered IRC § 6651(a)(2) failure-to-pay or IRC § 6654 estimated-tax penalties, the IRS assesses the penalty against the original return due date, not against the date the amendment is later filed. Kwong v. United States, 179 Fed. Cl. 382 (Fed. Cl. 2025), held that IRC § 7508A(d) automatically postponed those original due dates through July 10, 2023 for the COVID disaster period. Penalties computed off the pre-postponement dates may have been computed against the wrong baseline.
A Form 843 protective claim, filed under Treas. Reg. § 301.6402-2(b)(1), preserves the right to seek abatement (for assessed-but-unpaid penalties) and refund (for any penalties already paid) under the Kwong theory. The points below focus on the crypto-specific overlap.
Why crypto traders encounter the overlap more often
Four facts converge to make 2018-2022 crypto traders a high-incidence Kwong-overlap population:
Recordkeeping was hard during the relevant window. Pre-Rev. Proc. 2024-28, basis tracking was per-pool (or worse, per-platform) rather than per-wallet. Exchanges shut down, reopened under new names, and lost user-level history. CSV exports from popular tools were inconsistent across versions. Many returns filed for 2018-2022 went on extension and then went late.
Realization-event volume was high. DeFi summer 2020, the NFT bubble of 2021, and the ETH-to-WBTC bridging that ran across the period each generated dozens to hundreds of disposals per active wallet under the IRS’s Notice 2014-21 reading of IRC § 1001. A trader who actually filed accurately may have had a return with hundreds of Form 8949 lines. A trader who filed inaccurately, typical, often filed with material understatements that later required amendment.
Payment shortfalls were common. Crypto markets were volatile within the same tax year. A trader who realized gains in Q1 and then lost those gains by Q4 still owed tax on the Q1 gains, against income they no longer had liquid. Underpayments triggered IRC § 6651(a)(2) failure-to-pay penalties and IRC § 6654 estimated-tax penalties. The transcript will typically show those as TC 276 and TC 170 / TC 176 entries.
Late filings were common. Extension stacks running into October were normal. When even those October deadlines slipped, which they frequently did for traders trying to reconstruct a year of DeFi activity from incomplete records, the IRS assessed § 6651(a)(1) failure-to-file penalties off the original April due date. The transcript shows those as TC 166 entries.
All four of these failure modes generate penalties that Kwong now reads as computed off the wrong baseline. The crypto-trader fact pattern produces them at unusual density.
How the overlap appears in a typical amendment file
A 2018-2022 crypto amendment engagement typically opens with a transcript pull. The transcript will show:
- the original assessment date for the return
- any TC 166 (late-filing penalty) entries
- any TC 170 or TC 176 (estimated-tax penalty) entries
- any TC 276 (late-payment penalty) entries
- TC 196 (interest charged) entries layered on top of the above
- any reversals (TC 167 for reversed late-filing, etc.), these are out of scope for the protective claim because they have already been removed
For each tax year being amended, the practitioner should be asking two questions in sequence:
First, does the underlying income picture need a 1040-X? If yes, the 1040-X mechanics control. The amendment is filed on Form 1040-X with corrected Form 8949, Schedule D, and any adjusted Schedule 1 line 1z or 8v figures. The Form 1040-X has its own three-year limitations period under IRC § 6511, generally running from the later of the original return due date or the date the original return was actually filed.
**Second, was the original return penalized in a way that Kwong may recompute?** If the transcript shows penalties with assessment dates tied to original due dates falling inside the COVID disaster window through July 10, 2023, the second track applies. A Form 843 protective claim should be drafted alongside the 1040-X. The protective claim does not depend on whether the 1040-X is approved, denied, or partially allowed. It is independent procedural posture targeting a different remedy.
The fact that the same return-year may carry both tracks is not unusual, it is the normal configuration for late-filed 2018-2022 crypto returns with payment shortfalls.
What the protective claim does not change
The protective claim is narrow. It does not:
- excuse the underlying tax liability
- correct cost basis or character
- relieve the taxpayer of the obligation to file accurately going forward
- substitute for first-time abatement, reasonable-cause abatement, or any other separate penalty-relief mechanism that may also apply to the same year
- address state-level penalties (which run on state procedural calendars and are unaffected by federal IRC § 7508A(d) postponement)
A taxpayer who is eligible for both Kwong protective filing and first-time abatement under IRM 20.1.1.3.6 may use both. They are not mutually exclusive. But the protective claim is the time-pressured one. First-time abatement remains available administratively on the standard request channels for as long as the year remains within the IRC § 6511 limitations period.
The decision framework for a crypto-trader amender
A 2018-2022 crypto amendment file should include a Kwong check as part of routine review. The check is short:
- Pull the IRS account transcript for each amendment year being considered.
- Identify penalty transaction codes (TC 166, 170, 176, 276) and the dates they were assessed.
- Check whether each penalty’s underlying due date falls inside the COVID disaster postponement window through July 10, 2023.
- For each penalty in scope, the year is a Kwong-protective-claim candidate. Add a Form 843 protective filing alongside the 1040-X.
- For each year in scope, draft a year-specific Kwong protective statement under Treas. Reg. § 301.6402-2(b)(1) identifying the affected transcript entries and reserving the taxpayer’s right to recompute as the issue resolves.
Years that come back with all penalty TC entries showing reversals (TC 167 / 277 / etc.) before any further assessment, or years with no penalty entries at all, do not need a protective filing. Years with active unreversed penalties tied to in-scope due dates do.
Wet-ink signature and mailing logistics
Form 843 is not on the IRS permanent e-signature list under IRM 10.10.1 (the October 2023 update to Exhibits 10.10.1-1 and 10.10.1-2 added a defined set of forms; Form 843 was not among them). The taxpayer and the paid preparer must both sign the form in wet ink. For a crypto trader handling a multi-year amendment alongside multiple Kwong protective filings, this means physical handoff and certified mail for each year being filed protectively. The 1040-X can be e-filed (subject to the IRS’s e-filing window for the relevant tax year); the Form 843 cannot.
The certified-mail postmark date controls timely filing under IRC § 7502(a)(1). A protective claim mailed by certified mail on July 10, 2026 (the postmark date) is treated as timely even if the IRS service center receives it the following week.
When the file gets harder
This overlap between 1040-X work and a Kwong protective filing does not reduce well to a checklist alone. The transcript reading required to identify which TC entries remain claim-relevant, the joint-year handling when a former spouse is no longer available, the calibration of the protective-claim language under Treas. Reg. § 301.6402-2(b)(1), and the wet-ink mailing logistics across multiple years all require coordinated review.
This is particularly true where the underlying 2018-2022 crypto activity included DeFi, NFTs, multi-wallet reconstruction, or pre-Rev. Proc. 2024-28 basis-tracking issues. Those substantive complications interact with the Kwong protective filing in ways that a single-track amender, focused only on the 1040-X, typically misses.
For a return that already needs amendment work, the Kwong check is a related procedural step. The July 10, 2026 deadline matters because the protective-claim track has its own mailing and documentation calendar, separate from the 1040-X amendment work.
Article authority anchors: Kwong v. United States, 179 Fed. Cl. 382 (Fed. Cl. 2025); IRC §§ 7508A(d), 1001, 6045, 6402, 6511, 6651, 6654, 7502; Treas. Reg. § 301.6402-2; Notice 2014-21; Rev. Proc. 2024-28; Form 843 instructions (Rev. Dec 2024); Form 1040-X instructions; IRM 21.5.3 (claim processing); IRM 10.10.1 (e-signature program, Form 843 not on permanent list); IRM 20.1.1.3.6 (first-time abatement); National Taxpayer Advocate blog Parts I and III on COVID-era disaster-relief refund claims.