Unlike before, cryptocurrency is no longer flying under the radar. The Internal Revenue Service (IRS) has made digital asset enforcement a priority and if you hold or trade cryptocurrency, it is worth knowing what could put you on the IRS’s radar.
What tools does the IRS use to track cryptocurrency?
Major crypto exchanges in the United States must also follow Know Your Customer (KYC) rules. That means platforms such as Coinbase and Kraken collect personal details, such as Social Security numbers and government-issued IDs, and share tax data with the IRS.
Beginning in 2025, the IRS requires custodial brokers to track gross proceeds from digital asset sales, which will be reported on the new Form 1099-DA starting in the 2026 filing season. Furthermore, mandatory cost-basis reporting will begin for “covered” digital assets acquired on or after January 1, 2026.
Which behaviors draw IRS scrutiny?
Not every crypto holder will face an audit, but the following activities can attract a closer review:
- Providing a false “No” answer to the digital asset question on Form 1040
- Neglecting to report crypto-to-crypto trades, which the IRS treats as taxable events
- Making large or frequent wallet-to-wallet transfers that obscure the cost basis or acquisition dates of assets
High trade volumes, unreported staking or mining income and large gains without matching tax filings can also raise concerns. The IRS uses automated systems to compare third-party data with filed returns, and even small errors can generate a notice.
What should you expect if an audit comes?
If the IRS selects you for an audit, they will usually send you a letter instead of a phone call. It may send a CP2000 notice, which means the data on your return does not match records from a third party like a crypto exchange. You will then have 30 days (60 days if you live outside the U.S.) to respond.
The IRS may also send Letter 6173 or Letter 6174-A. While both address crypto reporting, Letter 6173 requires a response by a specified deadline, whereas Letter 6174-A is generally an educational notice that does not require a reply.
The agency has up to three years to audit a return and this extends to six years if you underreported your income by more than 25%. In cases that involve domestic and international fraud, there is no time limit.