{"id":353941,"date":"2019-04-30T13:28:10","date_gmt":"2019-04-30T18:28:10","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/tax\/federal-taxes\/cryptocurrency-taxes-and-regulations.html"},"modified":"2026-06-29T11:40:39","modified_gmt":"2026-06-29T16:40:39","slug":"cryptocurrency-taxes-and-regulations","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/tax\/federal-taxes\/cryptocurrency-taxes-and-regulations.html","title":{"rendered":"Crypto Tax Audits: What To Do if the IRS Flags Your Digital Assets"},"content":{"rendered":"\n
\n

Crypto Tax Audits: What To Do if the IRS Flags Your Digital Assets<\/h1>\n\n
\n
\n By J.P. Finet, J.D.<\/a> | Legally reviewed by Catherine Hodder, Esq.<\/a>\n | Last updated\n
\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
\n

This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
\n

The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

\n

The IRS<\/span> monitors cryptocurrency<\/span> transactions<\/span>, wallets<\/span>, and exchanges through digital asset<\/span> tracking to ensure tax compliance<\/span>. Using Form1099-DA, blockchain<\/span> analysis, and information from crypto exchanges<\/span>, the government can identify tax events thereby discouraging fraud or tax evasion<\/span>. Legal assistance may help in properly responding to cryptocurrency<\/span> tax<\/span> notices.<\/p>\n\n <\/div>\n\n\n\n

When cryptocurrencies<\/span> were new, early investors believed they could use them to gain value without government knowledge. However, government agencies like the Internal Revenue Service (IRS<\/span>)<\/a> soon realized that taxpayers<\/span> could use cryptocurrencies<\/span> to avoid paying taxes. As a result, the IRS<\/span> aggressively tracks digital asset<\/span> trading and taxable cryptocurrency<\/span> gains. This article examines and explains how the IRS<\/span> identifies crypto transactions<\/span><\/a>, the line between tax avoidance and illegal evasion, and the legal strategies you can employ to manage your tax liability<\/span> and respond to IRS<\/span> inquiries.<\/p>\n

The IRS<\/span> can be strict. Minor mistakes in your answers or in your well-intended tax\u2011savings plans can create costly problems later. Consider speaking with a tax attorney<\/a> before taking action. They can review your records, explain your rights, and guide you toward legal strategies that lower your tax burden without creating new risks.<\/p>\n

In the meantime, let\u2019s start by taking a look at the various ways the IRS<\/span> monitors crypto transactions<\/span>.<\/p>\n

How Does the IRS<\/span> Track Cryptocurrency<\/span> Trades?<\/h2>\n

The IRS<\/span> has made digital asset<\/span><\/a> reporting a major enforcement priority, resulting in more information than ever about\u00a0cryptocurrency<\/span> transactions<\/span>. The agency has built a detailed system for tracking crypto trading<\/span>, digital assets<\/span>, and activity across wallets<\/span> and crypto exchanges<\/span>. Let\u2019s take a closer look at what this means.<\/p>\n

Form 1099-DA and What It Reports<\/h3>\n

The centerpiece of this system is the new Form 1099-DA, which significantly expands the IRS<\/span>\u2019s visibility into crypto activity. Beginning with the 2025 tax year, U.S. brokers must issue Form 1099-DA<\/a> to both taxpayers<\/span> and the IRS<\/span>.<\/p>\n

This form reports only the gross proceeds from the sale or disposition of digital assets<\/span>, including cryptocurrencies<\/span>. It doesn\u2019t report transfers, deposits, staking<\/span> rewards, or other non-disposition events. Taxpayers<\/span> must still calculate their own cost basis and capital gains<\/span><\/a>.<\/p>\n

Cost basis is the initial value of the currency when you acquired it, which is usually the purchase price or the fair market value at the time you received it. The difference between the cost basis and the selling price is your capital gain<\/span>.<\/p>\n

Disposing of a digital asset<\/span> triggers the issuance of Form 1099-DA. In practice, this includes:<\/p>\n