Can the IRS Track Your Cryptocurrency?

<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>

Bitcoin and other cryptocurrencies can be traced, with transactions recorded on a public ledger accessible to anyone, including government agencies.

Need more information on US crypto taxation? Check out our comprehensive US crypto tax guides before reading further.

How Can Cryptocurrency Transactions Be Traced?

Despite perceived anonymity, blockchain technology allows cryptocurrency transactions to be traced. The blockchain serves as a public ledger, enabling anyone to view transaction records.

With a transaction ID, a blockchain explorer can identify wallet addresses and their histories. Government agencies, including the IRS and FBI, trace these transactions to individuals. Exchanges, under government pressure, collect and share customer data, linking wallet addresses to personal identities.

Subpoenas allow the IRS to extract data from cryptocurrency exchanges and financial institutions to investigate tax evasion. Entities like Coinbase, Circle, Kraken, and Bitstamp have been directed to provide comprehensive user account information and transaction records.

How Does the IRS Keep Track of Cryptocurrency?

The IRS uses several strategies to track crypto transactions for tax compliance:

• Third-Party Reporting: Exchanges report user transactions.
• Blockchain Analysis: Collaboration with firms to analyze transactions on the public ledger.
• John Doe Summons: Collect data on users from exchanges.

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 KYC checks, gathering personal and financial information, including biometric data. By 2025, the IRS plans to mandate crypto brokers, including exchanges and wallets, to issue Form 1099-DA, capturing detailed transaction data.

Can the IRS Monitor Transactions from Anonymous Crypto Wallets?

Despite the pseudo-anonymity of cryptocurrency transactions, they are traceable. 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.

<div fs-richtext-component="info-box" class="info-box warning"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f473e84badfdd6e059e_Care.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">The IRS has worked with firms like Chainalysis to analyze blockchain activities and target tax fraud, demonstrating its capability to monitor transactions from anonymous crypto wallets.</p></div></div></div>

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

In the US, all cryptocurrency exchanges must report transaction information to the IRS under the Bank Secrecy Act. This includes customer names, addresses, SSNs, and transaction details.

Exchanges Issuing 1099 Forms:

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

Upcoming regulations will introduce Form 1099-DA, requiring comprehensive reporting by all US-based crypto exchanges, including decentralized ones.

Which Crypto Exchanges Do Not Report to the IRS?

Some exchanges do not issue 1099 forms or collect KYC information for small-scale traders, including:

• Pionex
• Bisq
• Hodl Hodl
• ProBit
• TradeOgre

Decentralized platforms:

• Uniswap
• PancakeSwap

Caveats:

• Non-KYC exchanges often have transaction limits and may not serve US residents.
• Platforms like OKX and KuCoin have introduced KYC, restricting US users.
• Non-compliant exchanges, like Gate.io, may freeze accounts or withdraw services, posing risks.

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?

Yes, even non-custodial wallets can link your identity to a crypto wallet. For example, Trust Wallet links to credit/debit cards, connecting your bank account to your wallet. Banks must share information with the IRS, drawing attention to your crypto transactions. Transferring crypto between non-custodial and centralized exchanges also links wallet addresses. MetaMask’s policy update highlights the difficulty of maintaining anonymity. Accurate reporting and tax compliance are crucial.

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

The IRS checks cost basis by comparing it to previous tax returns for discrepancies. Changing your cost basis to reduce tax liability is illegal and considered tax evasion. Audits can extend up to six years if the cost basis is overstated by 25% or more.

<div fs-richtext-component="info-box" class="info-box warning"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f473e84badfdd6e059e_Care.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">Hiding cryptocurrency from the IRS is risky and illegal, with penalties up to 5 years in prison and 100,000$ fines. Instead, explore legal ways to minimize crypto taxes.</p></div></div></div>

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

You risk an audit within three years if the IRS suspects underreported crypto income. For fraud, there's no time limit on audits, emphasizing the need for accurate reporting.

Does the IRS Have the Ability to Track NFTs?

Yes, NFT transactions on public blockchains are visible and traceable. The IRS uses methods to link digital footprints to real identities, uncovering NFT ownership even when believed to be anonymous.

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

If you forgot to report crypto, amend your tax returns using IRS Form 1040X within three years of the original filing date. Correcting your taxes voluntarily shows compliance and may result in leniency. For deliberate underreporting, use Form 14457 for virtual currency disclosures, agreeing to settle taxes and adhere to IRS regulations to avoid severe consequences.

How to File Your Crypto Tax Return

For US tax returns involving cryptocurrency, familiarize yourself with necessary forms:

• Form 1040: The primary form for individual annual income tax returns, including income, deductions, and credits. Use it to report your overall income, including capital gains or losses from crypto transactions.
• Schedule D: Reports capital gains and losses from asset sales or exchanges, such as cryptocurrencies. Transfer the information from Form 8949 to Schedule D.
• Form 8949: Required for reporting multiple capital gains or losses on Schedule D, providing detailed transaction information. Use this form to report your capital gains or losses from your crypto transactions.
• Form 1099-K: Issued by cryptocurrency exchanges to users exceeding certain transaction volume and gross receipt thresholds, summarizing yearly payments.
• Form 1099-B: Provided by brokers or intermediaries to report cryptocurrency sales and related details.

The specific forms needed vary based on the nature and volume of your cryptocurrency transactions and your particular tax situation.

For detailed instructions on completing these forms, please refer to our articles:
Form 8949 and Schedule D

Form 1099

<div fs-richtext-component="info-box" class="info-box protip"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f4b151815fb0be48cec_Lightning.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">The IRS can audit tax returns up to six years back. Blockpit's free crypto portfolio tracker helps you keep essential records (date, type, amount, cost basis, profit, fees, etc.) organized. Try it now for free!</p></div></div></div>

How to File Your Taxes With Blockpit

Tired of manually entering all your trades into Form 8949? We've got you covered! As Europe's leading crypto tax firm, Blockpit's Crypto Tax Calculator offers acclaimed tax reports and pre-filled forms tailored for the United States. Our crypto tax software simplifies generating tax reports by importing transaction data from exchanges and wallets, automatically calculating capital gains or losses. It provides real-time tax calculations and shows unrealized gains or losses.

Want to see all the details? Check out the complete PDF of our crypto tax sample report.

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