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.
Can the IRS track anonymous wallets?
Because cryptocurrency transactions are pseudo-anonymous, many investors believe that they cannot be traced. This is not true.
Transactions on blockchains like Bitcoin and Ethereum are publicly visible. That means that the IRS can track crypto transactions simply by matching ‘anonymous’ transactions to known individuals.
In the past, the IRS has partnered with contractors like Chainalysis to analyze blockchain transactions and crack down on tax fraud.
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.
In addition, major exchanges issue 1099 forms to customers and to the IRS reporting on your crypto transaction activity. If you don’t report transactions that have been reported to the IRS via Form 1099, you may automatically be sent a warning letter about your unpaid tax liability.
In the future, the IRS will have even more information about cryptocurrency investors at its disposal. Due to the 2021 American infrastructure bill, major exchanges operating in the United States will soon be required to report all cryptocurrency disposals to the IRS.
Which crypto exchanges report to the IRS?
Most major exchanges operating in the US issue 1099 forms to customers. Exchanges that issue 1099 forms include, but are not limited to, the following:
Here are a few cryptocurrency exchanges that don’t require Know Your Customer information from customers and do not send 1099 forms.
KuCoin
MexC
HODL HODL
Many of these exchanges place restrictions on customer’s ability to trade without KYC. For example, you’re required to verify your identity to make crypto-to-crypto and derivative trades on MexC.
In addition, it’s important to remember that these exchanges may change their tax reporting policies in the future as the U.S. government cracks down on crypto tax evasion. In recent years, exchanges like Binance have introduced KYC policies in response to government pressure.
For more information, check out our list of non-KYC exchanges.
Why does the IRS ask if I own 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.
On the other hand, not answering this question truthfully is a red-flag to the IRS. 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 felony. The maximum penalty for tax evasion is 5 years in prison and up to $100,000 in fines plus the cost of prosecution.
Instead of trying to hide your cryptocurrency, check out our guide to avoiding crypto taxes legally.
The IRS can audit you if they have reason to believe that you are underreporting your taxable income from cryptocurrency.
Typically, the limit for conducting an audit is three years after a taxpayer has filed their tax return. In cases of fraud, there is no limit to how far the IRS can go back in a tax audit.
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.
Which crypto exchanges do not report to the IRS?
Currently, centralized exchanges like KuCoin and decentralized exchanges like Uniswap do not collect KYC (Know Your Customer) information from users.
However, it’s important to remember that exchange policies may change in the future as the U.S. government cracks down on crypto tax evasion. In recent years, exchanges like Binance have introduced KYC policies in response to government pressure.
For more information, check out our list of non-KYC exchanges.
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 acquired and disposed of your cryptocurrency, as well as your cost basis and proceeds from the disposal.
Individual investors report ordinary income from cryptocurrency on Schedule 1 of Form 1040.
For more information, check out our guide to reporting cryptocurrency on your tax return.
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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 the past, the IRS has also issued John Doe Summons to Coinbase and other exchanges to get access to 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?
‘Anonymous’ wallets can be traced back to specific individuals. 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 for tax evasion is 5 years in prison and a $100,000 fine.
Will the IRS audit my crypto?
You may be selected for a cryptocurrency tax audit if you’re randomly selected through the IRS’s statistical formula or the IRS has reason to believe that you are underreporting your income.
Yes. A variety of large crypto exchanges have already confirmed they report to the IRS. Back in 2016, the IRS won a John Doe summons against Coinbase. A John Doe summons compels a given exchange to share user data with the IRS so it can be used to identify and audit taxpayers, as well as prosecute those evading taxes.
The IRS can audit you if they have reason to believe that you are underreporting your taxable income from cryptocurrency. Typically, the limit for conducting an audit is three years after a taxpayer has filed their tax return.
If, after the deadline to report and any extensions have passed, you still have not properly reported your crypto gains on Form 8938, you can face additional fines and penalties. After an initial failure to file, the IRS will notify any taxpayer who hasn't completed their annual return or reports.
For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.
The receipt of coins from mining is subject to two tax recognition events: one when the coins are earned and the other when the taxpayer eventually, if ever, sells or otherwise disposes the coin. The IRS deems the first taxable event as ordinary income and the second as capital gains/losses.
2. What triggers a crypto audit? Unreported income is one of the most common reasons for the IRS to conduct a crypto audit. Most crypto exchanges send 1099-B or 1099-K forms to clients that exceed certain transaction thresholds, the copies of which are then sent to the IRS.
The IRS has made it clear that they expect people to report their cryptocurrency holdings on their taxes along with all capital assets. Failing to do so could result in a number of penalties, including fines and even jail time.
The best idea is to amend your tax return from whichever year(s) you didn't include your crypto trades. You have three years from the date that you filed your return to file an amended return. Some investors fear that submitting an amended return may increase their risk of a future audit.
In short, no. If you only buy crypto with USD and hold it without ever selling, you won't have to report any capital gains or income. However, you still have to answer the “crypto question” on IRS Form 1040. If you only bought crypto and didn't sell, you can answer “No,” given the changes made to the 2021 form.
The IRS classifies cryptocurrency as property or a digital asset. Any time you sell or exchange crypto, it's a taxable event. This includes using crypto used to pay for goods or services. In most cases, the IRS taxes cryptocurrencies as an asset and subjects them to long-term or short-term capital gains taxes.
Do I need to report crypto on my tax return? In the United States, cryptocurrency is subject to ordinary income and capital gains tax. While crypto transactions are pseudo-anonymous, it's important to remember that the IRS can track transactions through exchange-provided 1099 forms.
Instead of cashing out your cryptocurrency, consider taking out a cryptocurrency loan. In general, loans are considered tax-free. If you need liquidity immediately, you should consider using your cryptocurrency as collateral to take a loan through a decentralized protocol.
The easiest way for the IRS to track cryptocurrency is to receive information directly from exchanges. Most US exchanges, including Coinbase, already report trading activity to the IRS. Some foreign exchanges report to the IRS as well, and we expect this trend will only increase over time.
You need to report your crypto mining income to the IRS as part of your annual tax return. You report your income from mining on Form Schedule 1 (1040), or Form Schedule C (1040) if you're self-employed or running a mining business.
Hold crypto long-term. If you hold a crypto investment for at least one year before selling, your gains qualify for the preferential long-term capital gains rate.
The easiest way to defer or eliminate tax on your cryptocurrency investments is to buy inside of an IRA, 401-k, defined benefit, or other retirement plans. If you buy cryptocurrency inside of a traditional IRA, you will defer tax on the gains until you begin to take distributions.
You must report income, gain, or loss from all taxable transactions involving virtual currency on your Federal income tax return for the taxable year of the transaction, regardless of the amount or whether you receive a payee statement or information return.
Individuals and businesses are permitted to use Bitcoin and other similar currencies, although some states such as New York do impose licensing requirements on certain parties.
How much do you have to earn in crypto before you owe taxes? You owe taxes on any amount of profit or income, even $1. Crypto exchanges are required to report income of more than $600 for activities like staking, but you still are required to pay taxes on smaller amounts.
The IRS treats cryptocurrency as property, meaning that when you buy, sell or exchange it, this counts as a taxable event and typically results in either a capital gain or loss. When you earn income from cryptocurrency activities, this is taxed as ordinary income.
That's right, when you make purchases using crypto, this counts as a taxable event you'll need to report on your tax forms just like selling a stock and using the resulting money to buy something. You'll need to keep track of all these transactions so you can determine your tax liability accurately on your tax return.
Yes, the government (and anyone else) can track Bitcoin and Bitcoin transactions. All transactions are stored permanently on a public ledger, available to anyone. All the government needs to do is link you to your wallet or transaction.
Being the best privacy coin, Monero doesn't just keep receivers private. It also offers Ring Confidential Transactions (RingCT) to hide the wallet address of senders. This privacy measure even hides transaction amounts.
In fact, peer-to-peer platforms like BitQuick and LocalCryptos allow you to directly deposit fiat money into the seller's bank or mobile wallet account with zero verification. These are the best ones for those who want to buy BTC anonymously. Some like BitQuick do not have limitations on the amount traded.
The IRS generally treats gains on cryptocurrency the same way it treats any kind of capital gain. That is, you'll pay ordinary tax rates on short-term capital gains (up to 37 percent in 2022, depending on your income) for assets held less than a year.
Taxes are due when you sell, trade, or dispose of cryptocurrency in any way and recognize a gain. For example, if you buy $1,000 of crypto and sell it later for $1,500, you would need to report and pay taxes on the profit of $500. If you dispose of cryptocurrency and recognize a loss, you can deduct that on your taxes.
A cryptocurrency exchange could issue Forms 1099-MISC, 1099-B, and/or Forms 1099-K to its users. Regardless of whether any of the below forms are issued, taxpayers are always responsible for reporting any and all digital asset income, gains, and losses on their annual income tax return.
Which crypto exchange does not report to IRS? Several cryptocurrency exchanges, such as KuCoin, OKX (except for P2P trades), and CoinEx, do not collect Know Your Customer (KYC) information or provide 1099 forms for most small traders.
Any Bitcoin or other cryptocurrency that you earn for your work mining may be reported to the IRS on Form 1099-NEC by the payer or mining pool. The person who mined the crypto then reports this amount as business income, even if the payment is made in-kind rather than as a cash payment. Cryptocurrency Wash Sale Rule.
Moving cryptocurrency between wallets that you own is not taxable. Typically, cryptocurrency disposals — such as selling or trading away your cryptocurrency — are subject to capital gains tax. You'll incur a capital gain or loss depending on how the price of your crypto changed since you originally received it.
Yes, the IRS can track cryptocurrency, including Bitcoin, Ether and a huge variety of other cryptocurrencies. The IRS does this by collecting KYC data from centralized exchanges.
IRS vs.Crypto: 5 Essential Tips to Avoid IRS Audits and Tax Penalties
Report Crypto Losses. Reporting any capital losses on your tax return can help reduce your tax liability for the current year and even in future years. ...
Under the current IRS Guidance, the 2020 version of IRS Form 1040, if you have received, sold, sent, exchanged, or otherwise acquired – at any time during the year – any financial interest in any virtual currency, you must attach a full crypto tax report to your return.
If you earn $600 or more in a year paid by an exchange, including Coinbase, the exchange is required to report these payments to the IRS as “other income” via IRS Form 1099-MISC (you'll also receive a copy for your tax return).
For example, if you trade on a crypto exchange that provides reporting through Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, they'll provide a reporting of these trades to the IRS.
Investors must report crypto gains, losses and income in their annual tax return on Form 8940 & Schedule D. Evading crypto taxes is a federal offence. Penalties for tax evasion are up to 75% of the tax due (maximum $100,000) and 5 years in jail. The IRS knows about your crypto already.
In short, no. If you only buy crypto with USD and hold it without ever selling, you won't have to report any capital gains or income. However, you still have to answer the “crypto question” on IRS Form 1040. If you only bought crypto and didn't sell, you can answer “No,” given the changes made to the 2021 form.
After meeting probable-cause and burden-of-proof requirements, law enforcement can get seizure warrants for any illicit funds that eventually land on compliant exchanges—and many funds eventually do.
A cryptocurrency exchange could issue Forms 1099-MISC, 1099-B, and/or Forms 1099-K to its users. Regardless of whether any of the below forms are issued, taxpayers are always responsible for reporting any and all digital asset income, gains, and losses on their annual income tax return.
Instead of cashing out your cryptocurrency, consider taking out a cryptocurrency loan. In general, loans are considered tax-free. If you need liquidity immediately, you should consider using your cryptocurrency as collateral to take a loan through a decentralized protocol.
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