Can the IRS Track Cryptocurrency? [2024]

<div fs-richtext-component="info-box" class="info-box"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f4cef4c34160eab4440_Info.svg" loading="eager" width="64" height="64" alt="" class="icon-info-box"><div fs-richtext-component="info-box-text" class="info-box-content"><p class="color-neutral-800">Starting January 1, 2024, the Infrastructure Investment and Jobs Act requires reporting 10,000$+ crypto transactions to the IRS. Yet, the Treasury and IRS deferred digital asset reporting until new regulations are set, promising future guidance and public input on these rules. We keep you informed! </p></div></div></div>

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Explore the intricacies of US crypto taxation and how the IRS keeps tabs on cryptocurrency transactions in 2024. This article sheds light on the necessity for exchanges to report to the IRS and the critical role of crypto tax tools in ensuring accurate reporting.

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Can Bitcoin and Other Cryptocurrencies Be Traced?

Yes, Bitcoin and other cryptocurrencies can be traced. Transactions are recorded on a public ledger, making them accessible to anyone, including government agencies. 

Centralized exchanges provide customer data, such as wallet addresses and personal information, to the IRS. The IRS has agents trained to link wallet addresses to individuals, and upcoming regulations will mandate both centralized and decentralized exchanges in the US to report user transactions to the IRS via form 1099-DA.

How Can Cryptocurrency Transactions Be Traced?

Cryptocurrency transactions, despite their perceived anonymity, can be traced using blockchain technology. The blockchain serves as a public ledger, allowing anyone to view transactions and permanent records on it. 

With a transaction ID, one can use a blockchain explorer to identify wallet addresses and their transaction histories. Government agencies, including the IRS and FBI, can trace these transactions back to individuals. This is increasingly feasible as crypto exchanges, under government pressure, collect and share customer data, linking wallet addresses to personal identities.

Are Subpoenas Used to Monitor Crypto Transactions?

Subpoenas, utilized by the IRS, are pivotal in extracting data from cryptocurrency exchanges and financial institutions to probe into tax evasion activities. Entities like Coinbase, Circle, Kraken, and Bitstamp have faced directives to divulge comprehensive user account information and transaction records.

This process allows the IRS to detect undisclosed cryptocurrency transactions by U.S. taxpayers. Despite the labor-intensive nature of dispatching subpoenas to multiple exchanges, this method stands as a potent mechanism for identifying taxpayers failing to meet their reporting obligations. It underscores the IRS’s adeptness in monitoring crypto transactions to enforce compliance with tax laws.

How Does the IRS Keep Track of Cryptocurrency?

The IRS employs several strategies to track cryptocurrency transactions for tax compliance:

Third-Party Reporting: Exchanges report user transactions, including transaction amounts and parties involved.

Blockchain Analysis: The IRS collaborates with firms specializing in blockchain analysis to scrutinize crypto transactions on the public ledger.

John Doe Summons: Used to collect data on users from exchanges based on specific criteria.

With a significant budget boost in 2022, the IRS is intensifying its focus on crypto, hiring over 87,000 agents for enforcement. Exchanges must conduct detailed Know-Your-Customer (KYC) checks, gathering personal and financial information, including biometric data. This facilitates linking transactions to individuals. By 2025, the IRS plans to mandate crypto brokers, including exchanges and wallets, to issue Form 1099-DA, capturing detailed transaction data, further enhancing tax oversight.

Can the IRS Monitor Transactions from Anonymous Crypto Wallets?

Despite the pseudo-anonymity of cryptocurrency transactions, they are not completely untraceable. Transactions on public blockchains, such as Bitcoin and Ethereum, are visible to anyone, including the IRS, which can potentially match 'anonymous' transactions to identifiable individuals.

The IRS has previously collaborated with firms like Chainalysis to analyze blockchain activities and target tax fraud, demonstrating its capability to monitor transactions from anonymous crypto wallets.

Which Crypto Exchanges Are Reporting Their Crypto Transactions to the IRS and When?

In the United States, all cryptocurrency exchanges are required to report certain transaction information to the IRS under the Bank Secrecy Act (BSA). This information includes customer names, addresses, social security numbers or tax identification numbers, and transaction details such as amounts and dates.

To align with IRS requirements, several exchanges have adopted the practice of issuing 1099 forms, effectively documenting users' transactional income.

Notably issuing 1099 forms are exchanges such as:

• Coinbase and its variants, Pro and Prime
• Binance US
• Gemini
• Kraken
• Bitstamp
• eToro
• Crypto.com
• Uphold
• Bittrex
• Robinhood Crypto
• PayPal Crypto
• Celsius

Anticipated legislative updates, including the introduction of Form 1099-DA for digital assets, will mandate comprehensive reporting by all US-based crypto exchanges, encompassing even decentralized exchanges, to ensure adherence to IRS guidelines. This legislative shift aims at establishing uniform compliance throughout the crypto trading sphere.

Which Crypto Exchanges Are Not Reporting Crypto Transactions to the IRS?

Several crypto exchanges bypass issuing 1099 forms and collecting KYC information for small-scale traders. Notably, this includes:

• Pionex
• Bisq
• Hodl Hodl
• ProBit
• TradeOgre

Additionally, decentralized platforms such as Uniswap and PancakeSwap also fall into this category.

However, there's a caveat: exchanges without KYC often impose transaction limits and may not allow US residents due to regulatory constraints. Recently, platforms such as OKX and KuCoin introduced KYC, further restricting US users. Additionally, exchanges not complying with US regulations, like Gate.io previously, may freeze accounts or withdraw services, posing risks to funds. Despite the drawbacks, major, compliant exchanges offer more security by adhering to IRS reporting and KYC norms, ensuring asset protection.

Is It Possible to Be Linked to My Crypto Wallet Address?

Linking your identity to a crypto wallet address is feasible, even with non-custodial wallets that typically don't collect KYC data. For instance, Trust Wallet enables users to link credit or debit cards for purchases, establishing a connection between your personal bank account and wallet. Given that banks are legally required to share information with the IRS, such transactions can draw IRS attention to your crypto dealings.

Additionally, transferring crypto between your non-custodial wallet and centralized exchanges, which do report to the IRS, might include your wallet address in shared data. Even MetaMask’s recent privacy policy update suggests possible tracking of users' IP and Ethereum addresses during transactions. This evolving landscape highlights the difficulty in maintaining anonymity in the crypto world, emphasizing the importance of accurate crypto reporting and tax compliance.

Why Does the IRS Inquire About Cryptocurrency Ownership?

The IRS has heightened its focus on cryptocurrency, introducing a question on Form 1040 in 2020 to identify taxpayers involved in crypto transactions. This query aims to collect data on the digital asset ecosystem, not to increase tax liability. However, dishonesty in response can signal a red flag, potentially raising the likelihood of an audit, as the IRS seeks to ensure compliance and understand the extent of crypto usage among taxpayers.

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How Does the IRS Determine the Cost Basis of my Cryptocurrency?

The IRS assesses cryptocurrency cost basis through comparison with previous tax returns, looking for discrepancies in reported figures and methods. Altering your cost basis to reduce tax liability is considered tax evasion. With a standard audit statute of three years, this extends to six years for overstating cost basis by 25% or more, significantly increasing the risk of audit for discrepancies.

Is It Possible to Hide My Cryptocurrency from the IRS?

Hiding cryptocurrency from the IRS is risky and constitutes tax evasion, a serious felony. Penalties can reach up to 5 years in prison and fines of 100,000$, alongside prosecution costs. Rather than concealing your crypto assets, it's safer and more prudent to explore legal methods for minimizing crypto taxes, as outlined in our guide.

Am I at Risk of an IRS Audit Over My Cryptocurrency?

If the IRS suspects underreported cryptocurrency income, you're at risk of an audit within three years of filing your tax return. For fraud, there's no time limit on how far back the IRS can audit, highlighting the importance of accurate reporting.

Does the IRS Have the Ability to Track NFTs?

Just like cryptocurrency transactions, NFT transactions on blockchains such as Ethereum are publicly visible and accessible. This transparency allows the IRS to employ the same investigative methods it uses to trace 'anonymous' crypto wallets to also identify 'anonymous' NFT holders. By analyzing transaction patterns and linking digital footprints to real identities, the IRS can effectively uncover the ownership of NFTs, even when the holders believe their assets to be anonymous.

What Actions Should I Take If I Forgot to Report Cryptocurrency on My Tax Returns?

If you've neglected to report cryptocurrency on your tax returns, whether by mistake or intentionally, the IRS has no limitation period to audit you if they suspect tax fraud. However, there are ways to mitigate the risk of penalties for crypto tax evasion.

The recommended approach is to amend your tax returns for the years you failed to report crypto, utilizing IRS Form 1040X. This amendment needs to be filed within three years of the original filing date. Correcting your taxes voluntarily shows the IRS your intent to comply, which can result in leniency.

For deliberate underreporting, the IRS has updated Form 14457 to include virtual currency disclosures. This voluntary disclosure application allows taxpayers at risk of criminal prosecution for tax law violations to come forward and rectify their mistakes. By submitting Form 14457, you agree to settle any outstanding taxes and adhere to IRS regulations, potentially avoiding more severe consequences.

How Should I File My Cryptocurrency Taxes?

To report your crypto taxes with the IRS, you must include your capital gains or losses on your tax return. Here is a general overview of how to report your crypto taxes:

Complete Form 8949: Use Form 8949 to report your capital gains or losses from your crypto transactions.

Transfer information to Schedule D: Transfer the information from Form 8949 to Schedule D.

Complete Form 1040: Use Form 1040 to report your overall income, including capital gains or losses from crypto transactions.

File your tax return: File your tax return by the tax deadline (usually April 15th, unless it falls on a weekend or holiday), or request an extension if needed.

It is essential to keep accurate records of your crypto transactions, including the purchase price, date of purchase, sale price, and date of sale.