How The IRS Knows You've Traded Crypto

Whether you’re a long-term crypto holder or have recently started trading, you may wonder: does the IRS know about my crypto?

The short answer is: Yes, they do.

The days of flying under the radar as a crypto user are well and truly over.

In 2015, the IRS began working with blockchain analytics companies like Chainalysis to monitor blockchain transactions. Fast forward to today, and in 2025, new cryptocurrency tax regulations make it easier for the IRS to track your crypto trades.

Centralized exchanges – such as Coinbase and Binance – will be required to report user transactions, and you’ll be expected to include this on your 2025 tax return.

This will make it easier than ever for the IRS to link your real identity with your on-chain transactions, which are already publicly available and easy to link.

Let’s look at how the IRS tracks your crypto, how long it’s been monitoring cryptocurrency for, what you need to report, the penalties for non-compliance, and most importantly, what to do if you’re behind on your reporting or get audited. We also take a look at new rules that are set to be introduced between 2026-2030.

Timeline – How the IRS has been monitoring your crypto over the years

2025

In 2025 new IRS regulations require brokers to report customer transactions, making it easier for tax authorities to track crypto activity.

These rules apply to brokers who “take possession of the digital assets being sold by their customers, including operators of custodial digital asset trading platforms, certain digital asset hosted wallet providers, digital asset kiosks and certain processors of digital asset payments (PDAPs),” according to the IRS.

This includes centralized crypto exchanges like Coinbase, stock trading platforms that sell crypto like eToro, and trading apps like Robinhood.

Starting January 1, 2025, brokers will begin tracking your transactions and reporting gross proceeds to the IRS. These transactions will be reported on Form-1099-DA, which will be sent to both users and the IRS in early 2026. By 2027 (for the 2026 tax year), brokers will start tracking and reporting your cost basis on the 1099DA, which means the IRS will have a thoroughly detailed view of your crypto ownership.

Similar to other 1099 forms used for reporting traditional investment income, information on Form 1099-DA will need to be added to your 2025 tax return. If you don’t include it, the IRS will notice as they already have the data, which will increase your chances of being audited.

These new regulations aim to “improve detection of noncompliance in the high-risk space of digital assets,” said IRS Commissioner Danny Werfel.

Transactions reported to the IRS include withdrawals to wallets, which means that the IRS is aware of your on-chain trading activity.

Contrary to what many people think, DeFi transactions and trading are taxable events that must be reported on your tax return. Failure to report could result in serious fines or penalties.

2020-2024

Since the 2020 tax season, every taxpayer has been required to answer a crypto-specific question on Form 1040: At any time during the year did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?

This broad question means that you’ve interacted with crypto in any way – even if you just held bitcoin – you would need to answer “yes.” The IRS introduced this question to track your crypto activity over time, ensuring they can monitor future transactions when you eventually sell.

Following the 2021 Build Back Better Act, crypto exchanges began issuing 1099-K and 1099-B forms to users in 2023. These forms were sent to traders–and then the IRS–who had more than $20,000 in proceeds and 200 or more transactions on an exchange. If you received one of these tax forms, the IRS is already aware of some of your crypto trades.

Even though during this time crypto taxes operated on a voluntary system, you were supposed to volunteer information about your trades and how much you owe.

However, the IRS identified cryptocurrency as one five problem areas where taxpayers could evade taxes and began criminal proceedings against tax avoiders. If you received a letter from the IRS stating you are under investigation, you were generally no longer eligible to voluntarily declare back-taxes and faced potentially reduced penalties.

2014-2020

Back in 2014, the US government declared all forms of digital currency as property, meaning when it was sold it was subject to tax. While crypto was originally envisioned as an alternative to government-issued currency, this ruling first signalled that regulators were interested in making some money from it.

By 2015, records indicate that the IRS had begun collaborating with blockchain technology companies, placing an order for work with Chainalysis in August of that year.

In December 2016, the IRS issued a summons to Coinbase, demanding records for over 500,000 customers who had traded crypto in previous years. Initially, Coinbase was required to provide user details for anyone with a single transaction–deposit or withdrawal–larger than $20,000.

The information Coinbase was required to provide included:

• Taxpayer ID number

• Name

• Birthdate

• Address

• Transaction logs

• Periodic accounts statements

With access to this information, the IRS had a clear path to identifying who owed them money, and could estimate the amount owed in many cases.

Looking ahead: Increased data sharing and accounting changes in 2026-2030

Accounting changes

In terms of accounting,cost basis reporting rules will come into effect in 2026. Your cost basis is the total amount you paid for a crypto asset, plus any transaction fees.

Initially scheduled for 2025, the new tax reporting rules require centralized crypto exchanges to change to the First In, First Out (FIFO) method of calculating capital gains unless otherwise specified by the user. FIFO considers the earliest bought crypto assets are sold first, which could result in higher capital gains taxes during market fluctuations.

These changes will require you to identify the cost basis of your assets for each individual wallet or exchange account. You must take action by 31 December 2025 to ensure compliance by 2026.

Increased data sharing for self-custodial wallets

Starting in 2027, certain digital brokers will be required to issue Form 1099-DA to taxpayers, reporting crypto asset proceeds from broker transactions to both users and the IRS.

For years, DeFi protocols have been operating in a grey regulatory environment, but that’s changing. Under the IRS’s new DeFi broker tax regulations, front-end trading services–including websites, non-custodial wallets, and browser extensions that allow users to exchange digital assets–will be classified as “brokers”.

Note: non-custodial wallets that only store private keys (without facilitating trades) will not be classified as brokers.

As a result, starting January 2027, DeFi trading platforms must track and report customer transactions and file Form 1099-DA with the IRS. As part of these regulations, DeFi brokers will also be required to comply with Know Your Customer (KYC) procedures, similar to traditional financial institutions. This involves collecting and reporting user information, such as names, addresses, and transaction details, on Form 1099-DA.

While these platforms will be required to report gross earnings of your trades, they won’t report on cost basis–the original price you paid for an asset–information since they don’t hold custody of your assets. You will still need to use crypto tax software like Crypto Tax Calculator to track your cost basis.

Does the IRS know about my DeFi trading?

The belief that crypto transactions are 'untraceable' and invisible to the IRS is a myth. The blockchain is a transparent ledger, open to anyone, making it a poor choice for evading taxes. It's the opposite of a hiding spot; it's a spotlight on every transaction you've ever made.

Crypto exchanges are also subject to Know Your Customer (KYC) requirements. Both domestic and international crypto exchanges collaborate with tax authorities around the world, and have data-sharing agreements, which means they must report your activities to the IRS. They keep detailed records of your transactions, making it easier for the IRS to follow the money trail, even if it's been through a mixer.

Finally, new rules announced in December 2024 by the U.S. Department of the Treasury and the IRS require crypto platforms to report digital asset transactions on Form 1099. Exchanges submit this form both to investors and to the IRS. In other words, even if you don’t report your income to the IRS, they likely already know about it.

In short, yes, the IRS likely knows about your crypto, or at least has the means to find out. The blockchain's transparency, combined with the IRS's growing tech-savviness and the reporting duties of exchanges, makes your crypto activities more visible than you might think. It's safer to assume the IRS is in the know and report your crypto transactions accordingly. Compliance is your best strategy when it comes to crypto tax.

Does the IRS know about crypto mixers and tumblers?

A crypto mixer or tumbler is a service that combines multiple users’ cryptocurrencies together to hide their owner and origin, allowing anonymous transfers to occur.

The largest crypto mixer running on the Ethereum blockchain is Tornado Cash, which has been sanctioned by the U.S. Treasury for laundering over $7 billion of virtual currency since 2019.

People believe mixing their crypto can protect their privacy and even help them dodge taxes. The bad news is that it isn’t just you that knows about it. The IRS is aware of these platforms and has ways of dealing with this type of tax evasion. The founder of Tornado Cash was famously imprisoned as a result of a joint FBI-IRS investigation. Even if you use a mixer, authorities will still be able to see that you accessed the mixer in the first place – which may be illegal – and potentially trace your transactions.

What if I get audited for my crypto trading?

The IRS has started auditing taxpayers specifically to evaluate their crypto trades. If you have made sure your tax reporting is compliant, then being audited is nothing to worry about. You are expected to disclose any addresses or wallets you own or control and any exchange accounts you have.

In addition, you have to provide some information about each individual transaction. This is where things can get a little trickier if transactions include DeFi activity, which is difficult to report without software like Crypto Tax Calculator.

You need to provide:

• The date and time each unit of virtual currency was acquired.

• The basis and fair market value (FMV) of each unit at the time of the acquisition. For crypto, FMV is the price it would sell for on the transaction date.

• The date and time each unit was sold, exchanged, or otherwise disposed of

• The FMV of each unit at the time of sale, exchange, or disposition, and the amount of money or the FMV of property received for each unit.

• Explanation of the method used to compute basis relating to the sale or other disposition of virtual currency.

This is where software like Crypto Tax Calculator) can help. Keeping track of all this information, especially in dollar terms, can be difficult for 10 transactions, let alone 100 or 1000. Crypto Tax Calculator automates this process for you and goes one step further by calculating the exact taxes you owe on all your trades.

What if you forgot to report crypto on your taxes?

Failing to report cryptocurrency transactions can lead to penalties, interest, and potential legal issues.

Here's what could happen and what you can do to rectify the situation.

Consequences of not reporting crypto transactions

• IRS notices and audits: The IRS receives copies of Form 1099s from exchanges and can match them against your tax return. Discrepancies may trigger an audit or notices such as a CP2000 notice.

• Penalties and interest: You may face failure-to-pay and failure-to-file penalties, plus interest on any unpaid taxes.

• Legal repercussions: Willful tax evasion can lead to criminal charges, including fines and imprisonment.

Example:

You forgot to report $5,000 in crypto gains. The IRS discovers this through third-party reporting.

You could face:

• Late payment penalty: 0.5% of the unpaid tax per month, up to 25%.

• Interest: Charged on the unpaid tax amount, compounded daily.

Partial reporting due to complex portfolios

If you reported some but not all of your crypto transactions – perhaps due to assets scattered across DeFi platforms and various exchanges – the IRS might question the incomplete information.

Example:

You reported trades from your main exchange but omitted transactions from a decentralized exchange (DEX). The IRS cross-references Form 1099s and notices missing income.

How to correct any mistakes on your tax return

Proactively correcting your tax return can mitigate penalties if you come forward before the IRS contacts you.

• File an amended return: Use Form 1040-X to amend your previous tax return. Include the missed crypto income or gains.

• Gather records: Compile comprehensive records of all your crypto transactions, including wallet addresses, transaction IDs, dates, and amounts.

• Consult a tax professional: Seek advice to ensure you correctly report and minimize potential penalties.

Example:

Realizing you omitted $2,000 in staking rewards and $3,000 in DeFi gains, you:

• File Form 1040-X.

• Report additional income on Schedule 1 (Form 1040) and capital gains on Form 8949 and Schedule D.

• Pay any additional tax owed, plus interest.

Potential penalties for failing to report crypto to the IRS

If you don’t report your taxable DeFi transactions to the IRS, it could end up costing you a lot more in the long run. The IRS imposes an accuracy-related penalty if you don’t report all of your income and, therefore, underpay your taxes.

First, you could pay a negligence penalty if you don’t make a reasonable attempt to follow the tax laws when filing your income tax returns. Examples of this type of negligence include not keeping proper records and not reporting income that was shown on a tax form, such as Form 1099. According to the IRS, this penalty applies if your disregard for the tax rules is either careless, reckless, or intentional.

You could also pay a tax penalty for substantial understatement of tax. This applies if you understate your tax liability by 10% or more of your required tax or $5,000, whichever is greater. The penalty for both negligence and substantial understatement is 20% of the portion of the underpayment.

In addition to your tax penalty, you’ll also pay interest on both your underpayment and the penalty itself. Interest starts accruing on the date income taxes are due — usually April 15 — and continues accruing until you pay what you owe.

Sources

Digital Assets, IRS, 2025

Where to Track Cryptocurrency Transactions, Bitstamp Learn, 2024

[Many Crypto Investors’ Transactions This Year Will Be Reported to the IRS for the First Time, CNN, 2025] (https://edition.cnn.com/2025/01/16/business/crypto-investors-third-party-tax-reporting-1099-irs/index.html

IRS Uses Chainalysis to Track Down Bitcoin Tax Cheats, Cointelegraph, 2017

Frequently Asked Questions on Virtual Currency Transactions, IRS, 2025

What the US infrastructure bill means for cryptocurrency brokers and owners | Part II, S&P Global, 2021

Final regulations and related IRS guidance for reporting by brokers on sales and exchanges of digital assets, IRS, 2024

U.S. Department of the Treasury Releases Final Regulations Implementing Bipartisan Tax Reporting Requirements for Brokers of Digital Assets, U.S. Department of the Treasury, 2024

IRS delays implementing crypto cost-basis reporting rules, The Block, 2025

US: IRS And Treasury Impose New Tax Rules For Crypto DeFi Platforms, IFC, 2025

Understanding The New IRS DeFi Broker Tax Regulations, Forbes, 2024

Decentralized platforms may benefit from strict US crypto tax laws, CoinTelegraph, 2025

Significant civil and criminal tax penalties for non-reporting of cryptocurrency transactions, Reuters, 2024

What Is a Bitcoin Mixer?, Ledger, 2023