When it comes to regulation, the cryptocurrency market has been seen by some as the Wild West. However, “Wild West” has long been a misnomer—and changes at the IRS will soon lead to an unprecedented wave of cryptocurrency audits and investigations.
“This is a major turning point—your crypto taxes cannot be ignored anymore,” says Andrew Gordon, tax attorney and CPA. “Soon, there will be an unprecedented amount of enforcement activity against digital assets. Taxpayers have a limited window to get their crypto taxes in order before the IRS targets them.”
The IRS began more closely scrutinizing cryptocurrency around a decade ago as digital assets became more and more broadly adopted by the masses. And starting in January 2025, new reporting requirements will lead to an even higher level of scrutiny. The ramifications will be felt most by those who are unaware or unprepared.
-Andrew Gordon, Tax Attorney & CPA
It’s a new level of scrutiny on top of an already urgent matter. Surveys indicate that the majority of crypto investors in the United States have not reported digital assets on their taxes. And every single one of those investors is at risk of a tax audit or a criminal investigation.
Here, we’ll talk about the urgent changes that will begin in the new year, as well as how you can prepare yourself and avoid an audit (or worse) with confidence. Let’s start by diving deeper into upcoming changes.
The IRS Crackdown of 2025: What to Know
So what exactly constitutes the IRS “crackdown” of 2025? Put simply: The IRS has changed its oversight of crypto transactions.
Beginning in 2025, brokers will be required to report crypto investors’ sales and trades, meaning that most crypto activity will be tracked. Because of this new level of activity tracking, taxpayers will receive the recently unveiled Form 1099-DA from cryptocurrency brokers, including DeFi exchanges like Uniswap.
The new tax form was created specifically by the IRS for reporting digital assets. (See an example draft of the form here).
It is anticipated that the form will go into effect for the 2025 tax year, which means that taxpayers will receive the form in 2026. But while the goal of this form is to simplify digital asset reporting, there will inevitably be a rise in challenges for crypto investors.
-Andrew Gordon, Tax Attorney & CPA
Potential Consequences for Crypto Investors
The goal of Form 1099-DA is to make it simpler for taxpayers to report digital assets. However, the form could simply represent the calm before the storm for some crypto investors.
It is highly likely that this new form and additional crypto tax reporting will lead to an unprecedented wave of cryptocurrency tax audits for investors in the coming years. If you are an investor who receives Form 1099-DA but has not reported crypto on your tax returns in the past, you might be a prime target for an IRS audit. And the IRS now has more resources at its disposal to execute audits of individual investors.
As a part of the Inflation Reduction Act of 2022, the IRS received an $80 billion annual budget increase. The influx of cash for the agency will allow it to dedicate even more time and resources to focus on auditing large corporations and wealthy taxpayers, as well as enforcing cryptocurrency users’ tax compliance.
The IRS has stated explicitly that “expanded work on digital assets is one of the priority areas where the IRS will focus” in using those funds to target “very low-hanging fruit.”
Says Gordon, “I’ve been preparing crypto taxes and defending crypto audits for 10 years now. Whenever the IRS gets more information about taxpayers’ crypto, audits follow. Now, not only will we see more crypto audits, but I expect the IRS will start opening a huge number of criminal tax cases, as well. They’ll want to make an example out of people who don’t report.”
While we don’t yet understand the complete scope of the impact the IRS changes and Form 1099-DA will have on crypto investors, we do know that a tangible impact for tax reporters will be a rise in audits of individuals.
In 2018, Coinbase was required to share records for about 13,000 users with the IRS. Then in July 2019, the IRS announced the mailing of letters to more than 10,000 taxpayers who may have reported crypto transactions incorrectly or not at all. Many of these warnings escalated into cryptocurrency tax audits.
Additionally, IRS Notice CP2000 has been used for several years to initiate cryptocurrency tax audits. From our team’s experience, investors who use platforms like Robinhood and BlockFi, which send annual tax forms to the IRS, are the most likely to receive these notices.
It’s safe to say that when the IRS gets more information about taxpayers’ crypto activity, audits will follow.
Prepare in 2025 to Avoid an Audit in 2026
Audits can feel quite intimidating for any taxpayer, and we have some tips and best practices for what to do if you do get audited by the IRS. However, audits are not inevitable. The best course of action is to take the appropriate steps to avoid encountering one.
Go Back to the Beginning
To avoid audits, we advise cryptocurrency investors to be sure to go back and report crypto on their taxes in accordance with the most up-to-date laws and guidelines.
Start with the first year that you began to invest in crypto, or the cost basis (an essential piece of information for your calculations) will be missing.
Consider Voluntary Disclosure: A Pathway to Avoid Prison
A simple “yes or no” question has raised the stakes for tax reports. For several years, Form 1040 (the standard tax return) has asked the following question about digital assets: “At any time in 2024, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
And the IRS has previously established in criminal cases that by checking “no” to the questions about foreign accounts, an individual was willful in their failure to report. However, there is a way for crypto investors to voluntarily come forward and substantially lessen the risk of a criminal tax investigation.
The Voluntary Disclosure Program gives taxpayers who willfully left certain information off their tax returns an opportunity to come forward and take steps to get back in good standing with the IRS and avoid criminal charges. The IRS added cryptocurrency to the VDP in 2022.
“Many crypto investors don’t understand how serious the consequences are for intentionally leaving crypto off your tax return,” says Gordon. “It’s extremely risky to wait and see whether the IRS comes after you. If they do, the consequences will probably be much worse than if you came forward voluntarily. But if you take steps to correct your crypto taxes now, you have time to remedy the situation so you can sleep at night.”
By reporting your crypto and completing the VDP if it applies to you, you’ll be better positioned to avoid criminal charges and save time, stress, and money.
The Clock Ticks, But There’s Still Time for a Fix
Like the era of the Wild West, everything has an expiration date. And the time you have to ensure that your crypto taxes are in order is no different.
Nearly half of American adults own some form of cryptocurrency. And the rising number only incentivizes the IRS to dedicate more time and resources to regulation. With added scrutiny from the IRS, the new Form 1099-DA, and an upcoming influx of cryptocurrency tax audits likely to arrive in 2026 and beyond, time and effort dedicated to your crypto taxes have never been more urgent.
But fortunately, there is still time left on the clock to get your crypto taxes in order and do so with confidence—with the right help.
-Andrew Gordon, Tax Attorney & CPA
Need Help Getting Your Crypto Taxes In Order? Gordon Law Makes It Easy
If you’re a crypto investor who needs help fixing your crypto taxes in order to help avoid an audit, reach out to Gordon Law for a consultation. With years of experience helping investors navigate crypto taxes as well as experience defending audits should the issue arise, we can put your mind at ease and make tax season as stress-free as possible.
Gordon Law has been a leader in the field of cryptocurrency law and taxation since 2014. We’ve helped more than 1,000 crypto investors and prepared more than 1,500 crypto tax reports. We’ve also helped clients successfully navigate the Voluntary Disclosure Program.
We believe that tax regulations shouldn’t be an obstacle to achieving a better financial future. Let us guide you through your crypto reporting requirements and avoid the wrath of the IRS.
