IRS Pushes Cryptocurrency Reporting, Yet Many Taxpayers Don’t Comply

With tax day approaching, taxpayers may be staring at a key question at the top of their Form 1040 – At any time during 2025, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)? Selling cryptocurrency creates a taxable event, where the seller must report their gains or losses from the transaction and face tax consequences. Whether and to what extent taxpayers pay taxes on the sales of cryptocurrency has long been questioned. The IRS has revamped its cryptocurrency reporting requirements in recent years. However, it is less clear whether their requirements are enough to ensure taxpayers comply with the tax law. A recent academic study explores this question and finds evidence that there is, in fact, a large number of taxpayers not reporting their cryptocurrency transactions on their tax forms.

Cryptocurrency Tax Reporting

For the purposes of taxation, cryptocurrency is treated as a capital asset. This notion means that when a taxpayer purchases a cryptocurrency, that taxpayer has a basis in that asset. This basis holds steady as the value of the cryptocurrency goes up or down, leading to gains or losses that are unrealized. The Internal Revenue Code allows taxpayers to not face any tax consequences until the taxpayer has the wherewithal to pay those taxes. Thus, regardless of how high or low the current market value of that cryptocurrency is, the taxpayer will typically not have tax liabilities (or tax benefits) until the cryptocurrency is sold.

Once sold, the taxpayer will either have a gain – the sales price is more than the purchase price, or a loss – the sales price is less than the purchase price. If sold at a gain, the taxpayer will pay taxes on the gain at their ordinary income tax rate (ranging between 10% and 37%) if held for one year or less, or at a preferential tax rate (ranging between 0% and 20%, as high as 23.8% when factoring the net investment income tax) if held for more than a year. If sold at a loss, the taxpayer can use the loss to offset the tax liability from other capital gains. If no other capital gains occurred, the taxpayer can deduct $3,000 annually against their ordinary income until the loss is used up.

The reporting of cryptocurrency for tax purposes was effectively not present until 2019. Beginning that year, taxpayers had to explicitly respond to a question of whether they held cryptocurrency. While the effectiveness of this question was less clear, it represented the first time that taxpayers had to explicitly acknowledge on a federal tax form their cryptocurrency holdings.

This question has evolved over time to be more specific. Furthermore, according to H&R Block, starting in 2025, taxpayers with cryptocurrency transactions will now receive Form 1099-DA, which reports transactions of cryptocurrencies, stablecoins, and non-fungible tokens (NFTs) through U.S.-based brokerage platforms. While taxpayers should have been reporting and paying taxes on their cryptocurrency transactions all along, this form is designed to improve compliance.

Who Reports Cryptocurrency To The IRS?

Recently published academic research in the Review of Accounting Studies examines a complex question surrounding cryptocurrency tax reporting. In a study titled “Who reports cryptocurrency to the IRS?”, researchers examined data from over 221 million taxpayers (over 1.3 billion tax returns in total) and found that only 7.6 million taxpayers report gains from cryptocurrency. This article is co-authored by Jeffrey Hoopes of the University of North Carolina at Chapel Hill, Tyler Menzer of Texas Christian University, and Jaron Wilde of the University of Iowa. Their study’s research question, simply put, is the title of the manuscript: Who reports cryptocurrency to the IRS?

In discussing the key motivation for examining their research question, Menzer states, “There is an idea in tax policy that the IRS should use ‘smart return’ features, that use behavioral psychology to increase tax compliance. In the case of cryptocurrency, this meant forcing taxpayers to affirmatively answer whether they had cryptocurrency transactions. We found it interesting to be able to examine whether just adding a box that taxpayers had to mark as yes/no would have an effect on tax compliance. This is especially important for cryptocurrency, where there are many barriers to traditional enforcement due to the anonymity and privacy of the blockchain.”

This study finds that “only between 32% – 56% of cryptocurrency owners may be reporting their transactions to the IRS. Since we have started the project, an entire industry of specialized cryptocurrency tax compliance firms and CPAs has sprung up, and we provide some evidence that this industry may be needed to help ensure tax compliance,” according to Menzer.

In digging into the geographical nature of their findings, Menzer stated, “We see it grow from basically nothing in 2014, to some bright spots in large cities like San Francisco, Los Angeles, CA, and Austin, TX, and then eventually throughout the whole country. One of the things that stood out was the general lack of cryptocurrency in states like Nevada and West Virginia, indicating fewer people in those states are reporting their transactions.” This result came as a surprise to the co-author team because it indicates potential non-compliance with the tax laws in specific geographical locations.

While this study is among the first to consider who reports cryptocurrency to the IRS, the authors suggest that there are many important considerations for the IRS as they continue to evolve their reporting requirements. “We provide some evidence that taxpayers may be confused about things like the virtual currency checkbox. That should inform regulators on when they are making decisions on where they can improve communication or information sharing. As we get into the first tax season with 1099-DA reporting, I think it is important to remember that cryptocurrency taxes can be complicated, and compared to stocks or bonds, they are relatively new. If taxpayers get more tax savvy with regard to their cryptocurrency transactions, estimates of revenue may need to be changed or re-evaluated.”

These findings have clear implications for the IRS and taxpayers holding cryptocurrency alike. For starters, the findings cast some doubt as to whether the simple box check of whether investors own cryptocurrency may not be as effective as intended, and that more reporting regulations may be necessary. Given that Form 1099-DA is now required to be issued to taxpayers, the taxing authority may need to monitor taxpayer compliance more carefully to ensure that it is meeting the intended objectives. For taxpayers, the IRS resources used to detect non-compliance have continued to strengthen over time. Taxpayers previously not reporting their cryptocurrency transactions need to be on alert if they continue to pursue this non-compliance behavior.