Crypto Taxes
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Can the IRS Track Cryptocurrency? - The Risks of Tax Evasion

Can the IRS Track Cryptocurrency? - The Risks of Tax Evasion

Trying to evade cryptocurrency taxes is a bad idea. 

As the cryptocurrency ecosystem has grown in size, the federal government has dedicated more resources to crack down on crypto tax fraud. 

In this guide, we’ll break down everything you need to know about how the IRS tracks cryptocurrency transactions. We’ll also share a simple method that can help you report your cryptocurrency on your tax return in minutes. 

Is cryptocurrency reported to the IRS? 

Cryptocurrency is considered property by the IRS and is subject to capital gains and ordinary income tax. 

IRS tracking crypto gains and income

Capital gains tax: If you dispose of cryptocurrency, you’ll incur a capital gain or loss depending on how the price of your crypto has changed since you originally received it. 

Ordinary income tax: If you earn cryptocurrency, you’ll recognize ordinary income based on the fair market value of your assets at the time you receive them. 

For more information on how cryptocurrency is taxed, check out our ultimate guide to cryptocurrency taxes

Why does the IRS want to know about cryptocurrency? 

In recent years, the IRS has increased scrutiny on cryptocurrency transactions. In 2020, a new question was added to Form 1040 that specifically asked taxpayers if they transacted in cryptocurrency during the tax year. 

Remember, answering yes to this question will not increase your crypto tax liability. It’s likely that the IRS is asking this question to gather more information about the digital asset ecosystem.

Not answering this question truthfully is a red-flag to the IRS, and it’s possible you’re more likely to be audited from doing so. 

How can I hide my cryptocurrency from the IRS? 

Trying to hide your cryptocurrency from the IRS is a bad idea. 

Remember, tax evasion is a serious crime. The maximum penalty for tax evasion is 5 years in prison and up to $100,000 in fines plus the cost of prosecution. 

The consequence for hiding cryptocurrency may be felt years down the line. In cases of fraud, there is no limit to how far the IRS can go back in a cryptocurrency tax audit

Crypto tax evasion

Instead of trying to hide your cryptocurrency, you can look through our list of 10 strategies to legally reduce your crypto tax liability

Do major exchanges report to the IRS? 

If you’ve signed up with a cryptocurrency exchange, you’ve likely given personal information such as your name, date of birth, and a copy of your personal ID. Major exchanges that operate within the United States are required by law to collect this information due to Know Your Customer (KYC) regulations.

The IRS can and has requested these records from exchanges. In the past, the IRS has issued John Doe Summons to exchanges like Coinbase and Kraken. 

IRS requesting information from crypto exchanges

In addition, exchanges like Coinbase, Gemini, and Kraken issue 1099 forms to customers and to the IRS reporting on your crypto transaction activity. 

In the future, the IRS will have even more information about cryptocurrency investors at its disposal. Starting in 2023, all brokers that facilitate crypto transactions will be required to report information about cryptocurrency disposals on Form 1099-B due to the American infrastructure bill. This includes all major exchanges operating within the U.S.

How does the IRS track cryptocurrency? 

Transactions on blockchains like Bitcoin and Ethereum are publicly visible. Using information obtained from exchanges, the IRS can match ‘anonymous wallets’ to known individuals.

 In the past, the agency has partnered with contractors like Chainalysis for this exact purpose. 

Can the IRS track NFTs? 

Just like cryptocurrency transactions, NFT transactions on blockchains like Ethereum are publicly visible. The IRS can use the same methods it uses to identify anonymous wallets to identify anonymous NFT holders. 

Are there any exchanges that don’t report to the IRS? 

At this time, DeFi exchanges don’t issue 1099 forms. Still, it’s a bad idea to evade taxes on DeFi transactions. 

It’s important to remember that decentralized exchanges like Uniswap operate through blockchains like Ethereum. These transactions are immutable and publicly visible, meaning they may be tracked back to taxpayers. 

In the future, it’s possible that DeFi exchanges may be required to report to the IRS. While centralized exchanges will be required to issue 1099-B forms starting in 2023, it’s not yet clear whether decentralized exchanges will be subject to the same regulations. 

For information, check out our complete guide to DeFi taxes

What should I do if I forgot to report my cryptocurrency in previous years? 

If you didn’t report cryptocurrency on your tax return in previous years, it’s recommended that you file an amended tax return. The IRS is more lenient to those who make a good-faith effort to pay their taxes. 

For more information, check out our guide: Forgot to Report Crypto on Your Tax Return?

How do I report cryptocurrency on my taxes? 

Cryptocurrency capital gains should be reported on Form 8949. You are required to include the date you originally acquired and disposed of your cryptocurrency, as well as your original cost basis and gross proceeds from the disposal. 

Cryptocurrency income may be reported on Schedule 1 or Schedule C depending on the specifics of your situation. 

For more information, check out our guide to reporting cryptocurrency on your tax return

Get started with CoinLedger

Looking for an easy way to file your cryptocurrency taxes? CoinLedger can help. 

The platform allows you to automatically connect major exchanges like Coinbase, Kraken, Gemini, as well as wallets like MetaMask. More than 300,000 investors use CoinLedger to generate a comprehensive crypto tax report in minutes. 

Get started with a free preview report — there’s no need to enter your credit card details until you’re 100% sure your information is accurate! 

Frequently asked questions 

Let’s sum things up by answering a few commonly asked questions about the IRS’s enforcement of cryptocurrency tax law. 

Can the IRS see Coinbase transactions? 

Currently, exchanges like Coinbase issue 1099 forms to the IRS. In addition, the IRS has issued John Doe Summons to Coinbase and other exchanges to request customer information. 

Do you have to pay taxes if you don’t cash out? 

There are certain situations where you’ll incur a tax liability even if you do not convert your cryptocurrency to fiat. Examples include earning staking/mining rewards or trading one cryptocurrency for another. 

Can you track someone using their Bitcoin wallet? 

In the past, the IRS partnered with contractors like Chainalysis to analyze blockchain transactions and identify ‘anonymous wallets’. 

What happens if you don’t report cryptocurrency on your taxes? 

Tax evasion is considered a felony. The maximum penalty is 5 years in prison and a $100,000 fine.


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