How the IRS Tracks Crypto in 2024

Tynisa (Ty) Gaines
ByTynisa (Ty) Gaines, EAReviewed byZac McClure, MBAUpdated on March 11, 2024 · minute read
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  • The IRS employs various methods, including blockchain analysis and exchange reporting, to track crypto transactions and ensure compliance with tax laws. 

  • Failure to report crypto transactions accurately can lead to legal consequences, making it crucial for US taxpayers to understand and fulfill their tax obligations.

Is crypto trackable?

Yes, cryptocurrency transactions are trackable, which is a key feature of blockchain technology. While transactions are pseudonymous, meaning they are not directly tied to a person's identity, the blockchain records all transactions. Each transaction includes the sender and receiver's wallet addresses, transaction amount, and timestamp.

This information is public and can be viewed by anyone with a blockchain explorer. However, identifying the individuals behind these addresses requires additional information or tools.

Can the IRS track crypto? The short answer is: yes, and it’s best to assume the IRS has complete transparency into your crypto transactions and to proceed accordingly, or risk a crypto tax audit.

How is crypto traceable?

Cryptocurrency transactions are traceable because they are recorded on a public ledger called the blockchain. The blockchain is a decentralized ledger that records all transactions across a network of computers. Network nodes verify each transaction through cryptography and record them in blocks that are added to the blockchain.

Crypto transactions are traceable because each transaction is linked to the previous one through a unique digital signature. This creates a chain of transactions that can be traced back to the original source.

While cryptocurrency transactions are anonymous, which means they don't reveal the identities of the parties involved, forensic analysis and blockchain analysis can be used to trace transactions back to specific individuals. Crypto exchanges typically also require a KYC (know-your-client) process that forces users to provide identification in order to on- and off-ramp fiat into crypto.

How does the IRS track crypto?

The IRS tracks cryptocurrency transactions through a variety of methods, including:

  1. Blockchain Analysis Tools: The IRS uses specialized software to analyze the blockchain and trace cryptocurrency transactions back to their source. These tools can identify patterns and trace transactions through multiple addresses.

  2. Subpoenas and Summonses: The IRS can issue subpoenas and summonses to cryptocurrency exchanges and service providers to obtain information about their users' transactions.

  3. Data Matching: The IRS compares information reported on tax returns with information obtained from other sources, such as cryptocurrency exchanges and third-party service providers, to identify discrepancies.

  4. Whistleblower Reports: The IRS has a whistleblower program that incentivizes individuals to report tax evasion. Whistleblowers who provide credible information that leads to the collection of taxes, penalties, and interest may be eligible for a reward.

Which crypto exchanges report to the IRS?

Several popular crypto exchanges are known to report user transactions to the IRS, in certain circumstances. These exchanges include:

Typical reports to the IRS can include forms 1099-MISC for US traders earning over $600 from crypto rewards or staking in a given tax year.

And which don’t?

Some cryptocurrency exchanges do not report user transactions to the IRS, including:

Regardless of whether an exchange reports to the IRS, US taxpayers are required to report crypto transactions, and it’s best to assume the IRS has full transparency into your crypto activity. When in doubt, consult with a crypto tax professional like ours at TokenTax for clarity and guidance.

When do crypto exchanges report to the IRS?

Cryptocurrency exchanges are required to report user transactions to the IRS under certain conditions, such as:

  • When a user buys or sells crypto on the exchange

  • When a user transfers cryptocurrency into or out of their exchange account

  • When a user engages in cryptocurrency trading activities that result in a gain or loss

Exchanges typically report these transactions to the IRS using Form 1099-B or Form 1099-K.

Wallet address tracing in 2024

Wallet address tracing in 2024 continues to be a complex process, involving advanced blockchain analysis tools and techniques. While cryptocurrency transactions are pseudonymous, meaning they are not directly tied to a person's identity, blockchain analysis can trace transactions back to specific individuals. This is done by analyzing patterns in the blockchain and linking transactions to specific wallet addresses.

Always assume your tax authority has full transparency into your crypto transactions, and be sure to follow local rules and regulations around crypto taxes.

Penalties if I did not report crypto to the IRS

Failure to report cryptocurrency transactions to the IRS can result in penalties and fines. The IRS considers crypto to be property, not currency, for tax purposes. This means capital gains and losses from cryptocurrency transactions are subject to tax reporting requirements and corresponding tax rates for cryptocurrency.

If you fail to report your cryptocurrency transactions accurately, you may be subject to penalties and fines for tax evasion.

How the IRS tracks crypto FAQs

Here are answers to frequently asked questions around topics including: how does the IRS track crypto, and can the IRS track crypto?

How does the government know when you sell crypto?

Governments can track cryptocurrency transactions through the blockchain, which records all transactions. By analyzing the blockchain, governments can trace transactions back to specific wallet addresses and identify individuals involved in crypto transactions.

What crypto app does not report to the IRS?

Certain cryptocurrency exchanges and apps do not report user transactions to the IRS. These include decentralized exchanges (DEXs) and peer-to-peer (P2P) platforms that do not have reporting obligations under US tax law.

Will the IRS know if I don't report crypto?

The IRS has various methods for tracking cryptocurrency transactions, including blockchain analysis tools, subpoenas, and data matching. If you fail to report your cryptocurrency transactions, there is a risk that the IRS will discover the discrepancy and take enforcement action against you.

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Tynisa (Ty) Gaines
Tynisa (Ty) GainesTax Expert at TokenTax
Tynisa (Ty) Gaines, EA has more than 20 years of experience as a tax professional. Ty has published numerous tax articles, two tax e-books, and an academic publication on cryptocurrency for the National Income Tax Workbook.
Zac McClure
Reviewed byZac McClureCo-Founder & CEO at TokenTax
Zac co-founded TokenTax after his career in international finance and accounting at JPMorgan, Imprint Capital and Bain. He has worked in more than half-dozen countries and received his MBA from the UPenn Wharton School.

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