Can The IRS Track Bitcoin? Yes, here’s how
Key takeaways
- The IRS can track your Bitcoin activity through exchange reporting, summons, and blockchain analysis.
- Failing to report crypto can lead to audits, penalties, or even criminal charges.
- Accurately reporting your crypto using proper tools is the safest and most compliant approach.
Given crypto’s decentralized nature, many investors may find themselves wondering whether they really need to report it on their taxes. After all, how will the IRS know if I don’t report?
The reality is, the IRS has multiple tools and initiatives to track crypto activity, especially for a big player like Bitcoin. Here’s how the IRS knows (or can find out) about your Bitcoin holdings and transactions:
How the IRS Knows You Own Bitcoin
Exchange reporting (1099s)
Crypto exchanges are required to report user transactions to the IRS. Starting with the 2025 tax year, new laws will mandate exchanges issue expanded 1099 forms to both you and the IRS summarizing your crypto trades (including cost basis).
Even before this, many exchanges have issued 1099-Ks or 1099-Bs for high-volume traders. The IRS can match these forms to your return. If a 1099 shows you had $50,000 of crypto proceeds and your return shows nothing, that’s a red flag.
John Doe Summons and data requests
The IRS has compelled companies like Coinbase, Kraken, and others to turn over lists of customers and their transaction data above certain thresholds.
For example, Coinbase was ordered to disclose users with over $20,000 in crypto transactions in a year (for 2013-2015), and the IRS sent out warning letters in 2019 to thousands of people who may not have reported. More recently, similar summons have hit other exchanges.
Essentially, if you used a major exchange and had substantial activity, the IRS either has your info or can get it.
Blockchain analysis
Bitcoin’s blockchain is public. Specialized firms like Chainalysis and Elliptic analyze blockchain data to identify addresses and cluster transactions. The IRS (and other agencies) use these services.
If your identity ever becomes linked to a Bitcoin address (say you withdrew from Coinbase to your personal wallet, Coinbase knows that address belongs to you), then any transactions from that address can be traced to you.
Even without an exchange, sophisticated analysis might connect addresses to individuals (through IP logs, spending patterns, etc.). The IRS has a whole Cyber Crimes unit that uses these techniques to find tax evasion and other crimes involving crypto.
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Enhanced enforcement
The IRS has put crypto on the priority list. They launched initiatives like Operation Hidden Treasure (aimed at unreported crypto income) and have trained agents in crypto tracing.
With additional funding in recent legislation, the IRS is expanding enforcement in areas like crypto. They’ve already sent multiple rounds of compliance letters and even pursued criminal cases against willful evaders.
All of this makes it clear your your Bitcoin activities aren’t invisible.
The IRS can find unreported crypto, either through matching forms, investigating exchanges, or analyzing the blockchain itself. The penalties for not reporting can be severe – back taxes, interest, accuracy penalties (typically 20%), or even fraud penalties (75%) and criminal charges in extreme cases.
Additionally, since 2020, your Form 1040 asks if you engaged in any digital asset transactions. This question is broadly worded. Answering “No” when you actually did have taxable crypto events could be considered perjury. It’s most used to remind taxpayers and catch out blatant denials. The safe move is to always answer truthfully (which for most crypto users is “Yes.”). Lying here could compound your problems if you’re audited.
But if you report properly and pay what you owe, you don’t need to worry. The IRS’s goal is to get voluntary compliance. Use tools (like Crypto Tax Calculator) and professionals to get your crypto tax reporting right.
If you realize you missed something in past years, it’s often best to amend your return or come forward before the IRS contacts you. The IRS tends to be more lenient if you correct mistakes proactively rather than them catching you.
(For a detailed look at how the IRS tracks crypto, see our article “How the IRS knows your crypto” which covers these enforcement methods and what they mean for taxpayers.)
