Key Takeaways:
Only 32 percent to 56 percent of US taxpayers with crypto holdings report transactions to the IRS, a gap that new Form 1099-DA broker reporting requirements are set to expose for the 2025 tax year.
"The data suggests a significant portion of taxpayers may be out of compliance," Erin Collins, the IRS National Taxpayer Advocate, said in a report to Congress in June, adding that much of this is unintentional "due to confusion or lack of guidance, not willful neglect."
The Form 1099-DA requirement, which took effect for transactions on or after Jan. 1, 2025, requires digital asset brokers to issue a tax form to investors outlining gross proceeds from various transactions. The mandate mirrors the 2011 rollout of Form 1099-B for stocks and mutual funds, which required brokers to report cost-basis and holding-period information.
The increased visibility "raises the odds that the IRS will identify discrepancies," Collins wrote, potentially exposing investors to enforcement actions. For taxpayers, the burden of determining cost basis, holding periods, and taxable events falls largely on their shoulders, as the crypto tax reporting infrastructure lags behind traditional securities.
Why Crypto Tax Reporting Remains Complex
Much of the tax-reporting infrastructure that exists for stocks and bonds does not yet exist for crypto, making it difficult for investors to determine basic information such as the initial purchase price, or cost basis, and the date of purchase. Cost basis determines capital gains, while the holding period determines whether an investor pays short- or long-term capital gains tax.
"The current crypto tax reporting system isn't unlike that of stocks and other securities roughly a decade or more ago," said Troy Lewis, a certified public accountant and professor of accounting and tax at Brigham Young University.
Transactions can "get complicated very quickly," Lewis said. "Transactions involving sales, exchanges, staking, mining, airdrops, and transfers often require difficult determinations related to cost basis, income recognition, and character," Collins wrote in her report.
Laura Walter, a certified public accountant and founder of Crypto Tax Girl, said investors typically buy crypto on platforms like Coinbase, then move it to personal digital wallets across multiple platforms. Many buy in and out of tokens frequently, selling bitcoin to buy ether or vice versa, resulting in hundreds of taxable transactions in a single tax year. "It becomes messy really quickly," she said.
Lewis identified so-called DeFi lending — borrowing and lending crypto without a financial intermediary — as the most challenging aspect of crypto taxation, given the self-executing smart contracts that help lending without an intermediary to keep tax records.
What Investors Can Do
Lewis recommends that crypto investors start preserving transaction histories now, rather than assuming exchanges will retain that information indefinitely. He advises tracking every wallet, exchange, transfer, fee, and transaction in one place, and recording dollar values and transaction times for DeFi activity and crypto-to-crypto exchanges.
Crypto tax software such as CoinTracking, Koinly, and Summ can help investors sort through the reporting burden, Walter said, though investors should choose tools that support all the digital wallets and exchanges they use.
"Ultimately, doing something to track crypto transactions will be better than doing nothing," Walter said. "It's overwhelming, but try not to be fearful and avoidant. You're not the only person in this boat."
The compliance gap carries real financial consequences. With the IRS now receiving broker-reported data on crypto transactions, discrepancies between reported and actual activity become easier to detect. Investors who fail to report accurately face potential penalties and enforcement actions as the 2025 tax filing season approaches. Tax rules and reporting requirements may change; readers should verify the latest IRS guidance before filing.
This article is for informational purposes only and does not constitute investment, tax, or legal advice.
