Crypto Investors in the IRS’s Crosshairs: How to Avoid Penalties

In December 2024, the IRS rolled out final regulations requiring brokers to report crypto transactions, including DeFi activities. Taxpayers who’ve been ignoring their crypto tax obligations now have less time to act, warn experts from Gordon Law, a Chicago-based firm specializing in cryptocurrency law, tax, and business matters.

“This is a major turning point—your crypto taxes cannot be ignored anymore. 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,” says Andrew Gordon, a tax attorney and certified public accountant (CPA).

Andrew Gordon, Tax Attorney, Certified Public Accountant (CPA).

Source: gordonlaw.com

IRS Cracks Down on Crypto Transactions

For over a decade, the IRS has closely monitored the growth of the cryptocurrency market as digital assets have gained traction. Starting in 2025, new reporting requirements will significantly strengthen this oversight. Brokers will be required to submit detailed information about crypto transactions and sales by investors.

To facilitate this, the IRS has introduced Form 1099-DA, which will specifically cover digital asset transactions. Investors can expect to receive the form in 2026 for the 2025 tax year. While designed to streamline tax reporting, this move also signals a more aggressive approach to combating unreported crypto activity.

Andrew Gordon warns that this is just the beginning: 

“I expect the IRS will start opening a huge number of criminal tax cases… They’ll want to make an example out of people who don’t report.”

The Growing Risks for Crypto Investors

Around 50% of adult Americans are estimated to own cryptocurrency, yet surveys reveal that most crypto investors in the U.S. have not reported their digital assets. For these individuals, the introduction of Form 1099-DA may mark the calm before the storm. The failure to disclose past crypto transactions, coupled with new reporting requirements, makes them prime candidates for IRS audits.

Furthermore, the IRS has received a significant boost in resources to enhance its enforcement efforts. Under the 2022 Inflation Reduction Act, the agency’s budget was increased by $80 billion annually, enabling large-scale audits targeting corporations, high earners, and crypto users.

The IRS has made its focus on digital assets clear. In 2019, the agency sent over 10,000 letters to taxpayers suspected of underreporting their crypto holdings, leading to several audits. With additional resources and the forthcoming Form 1099-DA, experts expect these enforcement actions to escalate sharply.

New IRS Rule: Form 1099-DA.

Source: gordonlaw.com

IRS's Track Record in Crypto Enforcement

The IRS has proven its resolve in tackling tax reporting issues in the cryptocurrency space. In 2018, the agency compelled Coinbase to release data on 13,000 users, setting a clear precedent for its aggressive approach to digital asset platforms.

Another key tool for triggering audits is the CP2000 notice, or “Income Underreporting Notice.” This is issued when the income reported on a taxpayer's return is lower than the amount reported by third parties, such as employers or financial institutions.

According to Gordon Law, in the 2021 tax year, the IRS notably targeted users of platforms like Robinhood and BlockFi with CP2000 notices.

“When the IRS gets more information about taxpayers’ crypto, audits follow,” explains Andrew Gordon. “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.”

Act Now or Face Penalties

To avoid potential penalties, crypto investors should revisit their tax filings from the outset of their investment journey.

Accurate reporting hinges on determining the cost basis—the original purchase price of an asset—which is critical for calculating gains or losses.

It’s also worth noting that the IRS has made it harder to evade responsibility by adding a direct question about cryptocurrency activity to Form 1040 (the standard tax return). Taxpayers are required to answer with a simple “Yes” or “No.”

A false response can have serious repercussions, as providing incorrect information on tax forms is considered deliberate misconduct.

Fortunately, for those who failed to report crypto transactions in the past, the IRS offers the Voluntary Disclosure Program (VDP), which was extended to include crypto assets in 2022.

This program allows taxpayers to come forward, correct their filings, and avoid criminal prosecution. However, participation must occur before an audit begins.

“If you take steps to correct your crypto taxes now, you have time to remedy the situation so you can sleep at night,” advises Gordon Law.