I guess I don't fully understand. I was unable to get sed to work by itself (most searches were for creating actual newlines and not the characters \n)
After a lot of trial and error, this seems to work.
Code:
cat file | tr \\n \# | sed 's:#:\\n:g'
hello\ngoodbye\n\n
Hopefully there won't be any #'s in the file ever! (I don't expect there to be)