IRS Gains Fresh Visibility Into Crypto Tax Errors

The Costly Crypto Tax Gap

Crypto taxes have long been a guessing game. Many owners of bitcoin, ether, and other digital assets simply cannot figure out what they owe, and a lot of them never end up reporting it.

A large share of crypto activity is effectively invisible, at least for now.

The IRS has noticed. Erin Collins, the IRS National Taxpayer Advocate, said in a June report to Congress that the data "suggests a significant portion of taxpayers may be out of compliance," much of it "due to confusion or lack of guidance, not willful neglect."

That excuse is about to get weaker.

A New Form Puts the IRS in the Room

Starting with the 2025 tax year, brokers are required to file Form 1099-DA with the IRS and send a copy to customers, covering digital-asset transactions from Jan. 1, 2025 onward.

Why does that matter? Because the agency gets its own copy, matching is easy, and Collins wrote that the increased visibility makes it more likely the IRS will spot mismatches and possibly take enforcement action.

Laura Walter, a CPA and founder of Crypto Tax Girl, said the agency has little patience for excuses. "The IRS isn't going to accept 'It was difficult, so I didn't do it' as an appropriate response," she said.

Why Crypto Reporting Is Such a Mess

Stocks and bonds have a sturdy reporting system built over decades. Crypto does not.

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Owners often cannot easily determine their cost basis, which is what they paid, or their purchase date. Those two facts decide whether a gain is short-term or long-term and how much tax is owed.

Troy Lewis, a CPA who teaches at Brigham Young University, said that information is "everything." He compared the situation to 2011, when the IRS started requiring cost-basis and holding-period reporting on stocks and mutual funds through Form 1099-B.

The IRS phased in that requirement over time, but crypto never got the same treatment. Investors can usually enter 1099-B data straight into their tax returns, yet crypto reporting has not reached that stage, Lewis said, so taxpayers still carry most of the burden.

A simple case is not that bad. Buy one bitcoin on one platform, hold it, sell it at a profit, and the math is manageable.

Real crypto use is another story. Collins wrote that "transactions involving sales, exchanges, staking, mining, airdrops, and transfers often require difficult determinations related to cost basis, income recognition, and character."

Lewis put it more bluntly: crypto transactions "get complicated very quickly."

Getting Ahead of the Paperwork

Part of the mess is how people actually hold crypto. Walter said investors commonly move coins from an exchange like Coinbase to a personal wallet, often because the bankruptcies at BlockFi, Celsius, and FTX made them worry about losing funds.

Different platforms support different tokens, so people end up with multiple wallets and shuffle crypto between them. "It becomes messy really quickly," she said.

Frequent trades add to the pile. Someone selling bitcoin to buy ether to ride a price swing creates a taxable transaction every time, and Walter said some clients need to report hundreds of those each year.

The hardest corner, according to Lewis, is DeFi lending, where people borrow and lend crypto without a bank or other intermediary. He called it "troubling," with many "small executing contracts" and no central record keeper.

Tax experts say the rules still apply even when they are messy.

Walter said software like CoinTracking, Koinly, and Summ can help, as long as it connects to every wallet and exchange a person uses. Her final point is for anyone staring at a spreadsheet in despair.

"It's overwhelming, but try not to be fearful and avoidant," she said. "You're not the only person in this boat. There are lots of people."

The IRS is getting better at seeing what happens on-chain. The investors who keep their own records will have answers ready when the questions come.

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