Crypto investors are facing significant changes in tax compliance, particularly with a recently highlighted compliance rate from the IRS indicating that only about 25% are likely to meet their tax obligations voluntarily. This dismal figure stems from an IRS review indicating a potential rise in compliance rates with impending regulatory changes.
Starting in 2025, investors utilizing centralized crypto exchanges will experience third-party reporting requirements, significantly impacting how transactions are tracked. Investors who sell or exchange cryptocurrencies on platforms like Coinbase will receive a Form 1099-DA (Digital Assets) from their exchange, which reports their sales and exchanges to the IRS. This form, set to be sent by January 30, 2026, aims to provide transparency and streamline tax filing processes.
Importantly, the introduction of the 1099-DA does not create new tax obligations but is designed to help the IRS verify reported income. Mismatches between a taxpayer’s return and the information on the 1099-DA can trigger scrutiny through the IRS’s Automated Underreporter system, which identifies discrepancies that require correction.
Despite concerns about increased oversight, there are potential benefits for taxpayers as well. The 1099-DA reporting can simplify documentation for investors by consolidating necessary information into a single form. However, certain transactions will also require reporting even if they don’t appear on the 1099-DA.
For the tax year of 2025, centralized exchanges are only compelled to report the gross proceeds of crypto sales, not the cost basis, which is crucial for calculating capital gains and losses. Starting in 2026, exchanges will begin reporting cost basis information, but only under specific conditions: the purchase and sale must occur on the same exchange, and no transfers can take place.
Certain transaction types will also have distinct reporting stipulations. For instance, transactions involving qualified stablecoins under $10,000, non-fungible tokens (NFTs) sold below $600, and wrapped tokens will not be reported on the 1099-DA, although investors must still report these on their tax returns. Meanwhile, trades involving SEC-regulated crypto exchange-traded funds will utilize Form 1099-B, similar to other investment vehicles.
Transactions conducted on decentralized exchanges, where users retain control of their assets, will not receive a 1099-DA due to a recent repeal of reporting requirements beginning in 2027. Nevertheless, these transactions must still be reported as taxable events.
Understanding the tax implications of capital gains and losses remains crucial for investors. Both crypto and traditional investments share similar tax treatments, allowing losses from one to offset gains from another. For instance, if an investor realizes $15,000 in capital losses while having $8,000 in gains for the tax year, they can offset the gains fully, apply an additional $3,000 of losses against ordinary income, and carry forward remaining losses for future use.
In light of these evolving regulations, it is imperative for crypto investors to stay informed about their reporting obligations and to ensure that their filings align with the information reported by exchanges, thereby minimizing the risk of future scrutiny from the IRS.
