The Looming Cryptocurrency Tax Crisis

Cryptocurrency taxpayers are on the verge of a major shock. Despite being 16 years into the Bitcoin era, taxpayers and accountants continue to claim that tax guidance is unclear or non-existent. However, the IRS is preparing for a historic wave of compliance audits targeting the cryptocurrency space, and taxpayers are largely unprepared. The IRS issued Revenue Procedure 2024-28 last year, providing clear guidance on how to track cryptocurrency from a tax perspective, including safe harbors for taxpayers to become compliant and deadlines for migration. The rules are now clear, and the IRS is poised to launch a wave of compliance audits for those who have not adapted. This reckoning has already begun, with an unprecedented number of 6174, 6174-A, and 6173 letters being sent out by the IRS. Typically, this time of year is quiet, but for several weeks, there has been a surge in phone calls from taxpayers receiving these notices from the IRS, demanding compliance. Crypto tax firms across the board are reporting similar activity, indicating that the IRS is aware of widespread crypto tax evasion and is now taking action to collect unpaid taxes. By strategically combining Rev-Proc 24-28 with the release of the new Form 1099-DA, the IRS is well-positioned to catch off guard taxpayers and accountants who have neglected to become compliant. The 2025 tax year will be crucial, as the IRS now has ample ammunition for audits. The days of using the defense that guidance was unclear are over, as the IRS has been explicit, and the penalties for non-compliance have been outlined. However, taxpayers and accountants still act as if they are in uncharted territory. Furthermore, Form 1099-DAs will be issued to both taxpayers and the IRS by brokers, but there is a significant catch: the form will not include the cost basis for the 2025 tax year and will likely include incorrect cost basis information for subsequent years. This means that when assets are transferred into an exchange and later sold, the sale is reported, but the exchange has no record of the original purchase price. In the absence of this information, the form defaults to a $0 cost basis, making it appear as if the entire sale amount is profit. For example, if you buy 1 ETH for $2,200, transfer it to Coinbase, and sell it for $2,500, and Coinbase does not have the cost basis, the form will show a $2,500 gain. Your actual gain would be $300, but unless you have tracked the basis yourself, the IRS will assume the worst. This is not an isolated scenario; it will affect hundreds of thousands of taxpayers. If these inflated gains are not corrected, they will result in unnecessary tax owed or trigger an audit. Many accountants will not catch this issue, as most are not equipped to handle cryptocurrency properly. They do not understand how wallets work, confuse transfers with sales, and miss staking rewards and DeFi activity entirely. Clients assume their accountant is on top of it, while accountants assume the 1099 is accurate, and no one is double-checking. This is where things go wrong, and it is exactly what the IRS is counting on. The old defense that the guidance was unclear no longer holds up, as the IRS has been direct, and the expectations are clear. The time to address these issues is now, before an enforcement letter is received. Cryptocurrency is no longer a niche area; tens of millions of Americans have bought, sold, staked, lent, or transferred digital assets, and most have done a poor job of keeping records. The result is a tax system filled with underreported gains, misclassified income, inconsistent filings, and the tax authorities seeking revenge. The most common mistakes are not complex, such as transfers between wallets being flagged as sales, assets appearing on exchanges with no cost basis, unreported staking rewards and airdrops, and missing DeFi activity. These issues are widespread among cryptocurrency investors and, at scale, add up to a compliance problem that the IRS is now fully equipped to pursue. This is no longer about gray areas or technicalities; it is about the growing mismatch between how taxpayers think cryptocurrency taxes work and how the IRS now expects them to be handled. This gap is where the risk lies, and with established guidance, the IRS will not hesitate to take action.