The IRS and Crypto: Understanding Increased Enforcement Efforts

Beginning in 2025, your cryptocurrency trading activities will be reported to the IRS—whether you file the necessary tax forms or not.

Cryptocurrency traders are about to face new scrutiny as centralized exchanges begin mandatory reporting of digital asset transactions to the Internal Revenue Service. 

This shift marks the first time crypto transactions will be subject to comprehensive third-party reporting, fundamentally changing how digital asset activities are tracked in the United States.

The IRS And Crypto Tax Enforcement

The IRS’s heightened focus on cryptocurrency tax compliance stems from the substantial growth in digital asset adoption and concerns about potential tax evasion. 

The agency has identified significant gaps in reporting, with estimates suggesting that billions in cryptocurrency gains go unreported each year. 

Since 2019, the IRS has required all taxpayers to check a box on their tax return indicating whether they’ve received or disposed of a digital asset. 

Now the agency is introducing a new enforcement tool: Form 1099 DA (Digital Asset Proceeds from Broker Transactions).

What Is Form 1099-DA?

Form 1099-DA represents a standardized approach to reporting cryptocurrency transactions, replacing the previous patchwork of reporting requirements. 

The IRS released Form 1099-DA and final Instructions for Form 1099-DA in early January 2025. Beginning in early 2026, cryptocurrency exchanges and other digital asset service providers must provide detailed transaction information to both their users and the IRS. 

Form 1099-DA follows the same reporting principle as the familiar Form 1099 used for independent contractors and freelancers. Just as employers report freelancer earnings to both the contractor and the IRS, cryptocurrency exchanges will now send Form 1099-DA to both their users and the IRS. 

This dual reporting system allows the IRS to verify that traders are accurately reporting their cryptocurrency gains and losses, similar to how they verify freelance income reporting.

What’s Included On Form 1099-DA?

Form 1099-DA will be completed by crypto trading platforms, certain digital asset wallet providers, digital asset kiosks, and other processors. 

The Form 1099-DA requires reporting of specific transaction details, including:

• Purchase/acquisition and sale dates of digital assets
• Cost basis and sale proceeds
• The type of cryptocurrency involved
• Whether the transaction resulted in a gain or loss
• The character of the gain or loss (short-term or long-term)

For many crypto investors, this marks the first time their assets will be reported to the IRS. As such, Form 1099-DA will make it considerably more difficult to avoid crypto taxes. 

Crypto Taxes are Not New

To be clear, Form 1099-DA doesn’t institute a new tax. Rather, it’s a compliance mechanism to help ensure people pay what they owe. 

“By collecting more information from brokers, [digital asset owners] will receive a Form 1099 from brokers and be reminded that those transactions are taxable, thereby reducing the number of inadvertent errors or noncompliance,” according to a Treasury Department release.

Consequences Of Noncompliance

But what if you haven’t been reporting your crypto taxes all along? 

For taxpayers who have failed to report cryptocurrency transactions in previous years, the consequences of noncompliance can be severe. The IRS can impose substantial penalties, including:

• Accuracy-related penalties of up to 20% of the underpayment
• Civil fraud penalties of up to 75% for willful non-compliance
• Potential criminal prosecution in cases of significant tax evasion

Compliance Options

However, the IRS also provides options for taxpayers to come into compliance. The agency maintains various disclosure programs that may help taxpayers avoid the most severe penalties.

The Voluntary Disclosure Practice offers a pathway for taxpayers who may face criminal exposure, while other options exist for those whose non-compliance was inadvertent and non-willful—and who may be struggling to pay past-due crypto taxes.   

To avoid penalties and ensure compliance, cryptocurrency investors should maintain detailed records of their transactions, including:

• Purchase and sale documentation
• Records of cryptocurrency-to-cryptocurrency trades
• Documentation of mining income
• Evidence of hard forks or airdrops received
• Proof of payment for goods or services using cryptocurrency

The IRS’s enhanced enforcement efforts, combined with new reporting requirements, signal a clear message: Cryptocurrency taxes are not a grey area. The agency now has both the technical capabilities and legal framework to identify and pursue non-compliant taxpayers.

If you’re a cryptocurrency trader and you’re behind on your tax reporting, now is the time to consult with Tax Attorney Sammy Kim. She can guide you on how to report past activity, avoid or minimize penalties, and ensure you’re prepared for the increased scrutiny from the IRS.

Frequently Asked Questions On Crypto Tax Enforcement

Is digital asset tax enforcement on the rise?

Yes, cryptocurrency tax enforcement is underway. The IRS is auditing taxpayers to evaluate their crypto trades and levying penalties for non-compliance. 

Going further, in December 2024, the Department of Justice (DOJ) completed its first criminal tax evasion case centered on cryptocurrency. In that case, one early crypto trader was sentenced to two years in prison for underreporting capital gains from selling $3.7 million in bitcoin. 

“[He] will serve time because he believed his cryptocurrency transactions were untraceable…My team at IRS Criminal Investigation has the expertise and tools to track financial activity, whether it involves dollars, pesos, or cryptocurrency,” said Lucy Tan, Acting Special Agent in Charge of the IRS-Criminal Investigation Houston Field Office.

Looking ahead, the combination of new reporting requirements, enhanced technology, and greater institutional expertise suggests that crypto tax enforcement will continue to strengthen. Taxpayers should expect more frequent audits, stricter scrutiny of digital asset transactions, and reduced tolerance for non-compliance in the coming years.

What if I’m not using a centralized exchange?

Decentralized platforms won’t be required to provide third-party reporting until 2027. 

Nevertheless, DeFi (decentralized finance) transactions, peer-to-peer trades, and self-custody wallets still generate taxable events that must be reported to the IRS, even without receiving a Form 1099-DA. 

Taxpayers must maintain their own detailed transaction records, including dates, amounts, and the fair market value of the cryptocurrency at the time of each transaction. Remember that the lack of a Form 1099-DA does not exempt you from reporting requirements.

What challenges should I expect with the new Form 1099-DA reporting system?

The rollout of Form 1099-DA is likely to face initial implementation challenges. During the first few years, you may receive forms with incomplete or potentially inaccurate cost basis information, even while gross proceeds are correctly reported. 

It’s crucial to maintain your own detailed transaction records rather than relying solely on 1099-DA forms. If you receive a form with discrepancies, work with a tax professional to ensure accurate reporting and maintain documentation to support your filed positions.