For years, many crypto investors believed digital assets were anonymous and untraceable. But the IRS has dramatically stepped up its crypto enforcement game—and if you’re trading, mining, staking, or earning crypto in any form, they likely know about it.
So, how does the IRS track crypto? In short: data sharing, blockchain analysis tools, and mandatory reporting.
If you’re involved in crypto—even casually—it’s essential to understand what’s reportable, what red flags to avoid, and how to protect yourself. Here’s what every investor needs to know.
IRS Crypto Enforcement: A New Era of Scrutiny
The IRS has made it clear: crypto is no longer a gray area. Since 2019, the agency has asked taxpayers whether they’ve engaged in any crypto activity directly on Form 1040. And that’s just the beginning.
Here’s how enforcement has expanded:
- John Doe summonses issued to major exchanges like Coinbase, Kraken, and others to obtain customer data.
- AI-driven blockchain forensics, enabling the IRS to analyze public transaction histories on Bitcoin, Ethereum, and other chains.
- Increased audits and penalties targeting non-reporting or incorrect crypto tax filings.
Put simply, the IRS is using every tool available to track down unreported digital asset activity.
New Reporting Rule: Form 1099-DA for Crypto
Beginning in the 2025 tax year, crypto platforms will be required to issue a new type of tax form: Form 1099-DA (Digital Asset).
Here’s what it means for investors:
- Who gets it: Anyone who sells, trades, or receives crypto through a broker or exchange.
- What it includes: Gross proceeds from crypto transactions, cost basis, and gain/loss details.
- Why it matters: The IRS receives a copy—so if you don’t report the same activity, it triggers a mismatch and possible audit.
Previously, the lack of a standardized 1099 for crypto gave many investors the false impression that their activity went unnoticed. That’s no longer the case.
How Crypto Exchanges Share Your Data with the IRS
Most major crypto exchanges—especially those based in the U.S.—are now cooperating fully with the IRS. Even many international platforms are beginning to comply.
Here’s how your data flows:
- KYC (Know Your Customer) procedures tie your identity to your wallet activity.
- API connections transmit trading activity, withdrawals, and deposits to the IRS.
- Annual reports like 1099-K, 1099-B, or 1099-DA detail your transactions and income.
This means you don’t need to receive a form for the IRS to know you had taxable crypto activity. If your name, email, or SSN is associated with an account, you’re on their radar.
What Crypto Activity Must Be Reported?
A common myth is that crypto only needs to be reported if you cash out to fiat. In reality, virtually every type of crypto transaction can create a taxable event.
Here’s what you must report:
- Trades: Swapping one coin for another (e.g., BTC to ETH) triggers capital gains/losses.
- Sales: Selling crypto for cash is a taxable event.
- Airdrops and forks: These are usually treated as income when received.
- Staking and mining rewards: Taxable as ordinary income at the time of receipt.
- Spending crypto: Using it to buy goods or services counts as a sale, and triggers a gain or loss.
- Receiving crypto as payment: If you’re self-employed or a contractor, this must be reported as business income.
If you don’t track and report all of these correctly, you may be vulnerable to penalties—or worse.
Audit Red Flags for Crypto Traders
The IRS is especially focused on discrepancies between what you file and what it sees in its system. Here are the top red flags that could land your return in the audit pile:
- Receiving a 1099-DA but not filing a return (or omitting crypto activity altogether).
- Large gains reported with no supporting cost basis (IRS assumes zero basis = 100% taxable).
- Round-number reporting (suggests estimation rather than proper records).
- Frequent trading with no capital gains reported (especially for high-volume traders).
- Inconsistent income reporting from airdrops, staking, or mining.
Audits involving crypto can be detailed, invasive, and financially painful—especially if you don’t have clean records.
Common Mistakes Crypto Investors Make on Their Taxes
Even well-meaning investors can misreport or overlook critical parts of their crypto activity. These errors often lead to IRS notices, audits, or penalties. Here are some of the most common mistakes we see at Dimov Tax:
- Ignoring small trades: Every trade, no matter how small, needs to be reported. Many users mistakenly omit microtransactions thinking they’re irrelevant.
- Forgetting about gas fees: Transaction fees on networks like Ethereum can significantly impact your gains/losses—but many investors don’t factor them in.
- Mixing personal and business crypto: Using the same wallet for both business income and personal investing creates confusion and audit risk.
- Not keeping records: If you don’t document wallet addresses, exchange histories, and transaction timestamps, you could be in trouble if the IRS asks for verification.
- Assuming DeFi and NFTs are “off-grid”: Just because something happens outside of Coinbase or Binance doesn’t mean it’s invisible to the IRS.
Dimov Tax helps clients correct these errors before they become expensive problems—and we provide tools to make ongoing compliance simple and automated.
FAQs: How Does the IRS Track Crypto and Taxes
To wrap things up, here are answers to a few of the most common questions we hear from crypto investors:
Do I have to report crypto if I didn’t sell anything?
Not necessarily. But if you received income from staking, mining, airdrops, or as payment, you still must report that.
What happens if I don’t report my crypto activity?
The IRS may send a CP2000 notice for underreporting, initiate an audit, assess late fees, or in extreme cases, pursue fraud charges.
Can the IRS see my hardware wallet transactions?
Yes, if you move crypto from an exchange (that reports) to a cold wallet, the IRS can still trace it through the blockchain.
How far back can the IRS audit me for crypto?
Up to 3 years in most cases—but 6 years if you underreport income by 25% or more. If fraud is suspected, there’s no time limit.
Is there a statute of limitations if I never file?
No. If you don’t file at all, the statute of limitations doesn’t begin—and the IRS can pursue you indefinitely.
If you’re unsure about what to report or how to protect yourself, don’t wait for an IRS letter. Schedule a confidential crypto tax review with Dimov Tax today.
Dimov Tax Crypto Compliance Tips
Crypto taxes are more complex than stocks—and the stakes are higher. Here’s how Dimov Tax helps clients stay compliant while maximizing their deductions:
- Reconcile wallets and exchanges: We pull data from all your sources, even DeFi wallets and non-U.S. platforms.
- Calculate accurate gains and losses using FIFO, LIFO, or specific identification where allowed.
- Track staking, mining, and airdrop income so nothing falls through the cracks.
- Ensure Form 8949 and Schedule D reflect every transaction properly.
- Prepare audit-ready reports in case the IRS ever comes knocking.
Whether you’re a casual HODLer or an active DeFi trader, our crypto tax team ensures you’re both protected and optimized.
What If You Didn’t Report Crypto in Past Years?
If you’re realizing now that you’ve failed to report past crypto activity, you’re not alone—and there may still be time to fix it.
Here’s what you can do:
- File amended returns for years with missing crypto data.
- Request penalty abatement for first-time errors or reasonable cause.
- Engage a CPA before the IRS contacts you—proactive disclosure is viewed more favorably.
Dimov Tax has helped hundreds of clients correct past mistakes and avoid criminal investigations or excessive penalties.
Crypto Taxes Don’t Have to Be Complicated
So—how does the IRS track crypto? Through mandatory reporting, blockchain surveillance, and close exchange cooperation. But knowing how they track is only part of the equation. The real key is staying ahead of the curve, reporting correctly, and using every legal method to reduce your tax bill.
Dimov Tax helps crypto investors take control of their tax strategy, reduce their liability, and avoid audit risk.
Don’t let IRS scrutiny catch you off guard. Reach out to Dimov Tax today for crypto tax planning that’s smart, compliant, and future-proof.