Since cryptocurrencies are still relatively new, the rules that govern tax reporting of your transactions and gains or losses are in flux. Nevertheless, you must comply with all of the current rules, as you are tasked with understanding regulations before you file your returns and pay taxes. If you do not, you can face enforcement action from the IRS. Accordingly, if crypto transactions will have a large impact on your tax return that you will file this year, you should seek guidance from a New York tax lawyer from Thorgood Law Firm to ensure compliance.
The IRS is increasingly focused on crypto issues when it comes to your tax return. The agency recognizes that there are trillions of dollars in crypto holdings worldwide, and they are seeing issues with tax evasion. Accordingly, the agency is imposing new requirements on taxpayers, and they are placing much of the onus on you.
Transactions That Must Be Reported to the IRS
There are numerous types of crypto transactions that you will need to report on your tax return because they can trigger a taxable event. It is important to know when you will need to report a transaction because failure to do so can subject you to an audit and back taxes. Reportable transactions include:
- Receiving coins or tokens for mining or staking (here, you must be aware of the rules of income recognition and when you must report)
- When you pay for a transaction with crypto that you own (reporting the cost basis for the crypto)
- DeFi income when you have lent crypto or participated in a liquidity pool)
- Sales and exchange of crypto
The IRS instituted new rules for reporting certain crypto transactions in 2025. Although your broker may send you a form with all of your transactions, it is up to you to figure out and report your cost basis. Otherwise, the IRS may assume that you have a zero-cost basis for the crypto, and they may assess a large tax bill that you are not expecting. You can no longer rely on your broker for complete reporting, and you will bear the burden of any inaccurately reported crypto activity.
You Must Properly Report Your Income
It is not enough to just report any money that you made or crypto transactions that you engaged in during the prior year. You must also correctly report whether income is either a capital gain or ordinary income. Things like mining activity or staking rewards may count as ordinary income, while long-term trading activity qualifies for more favorable capital gains tax treatment.
Other New Rules Can Affect Your Reporting
The IRS instituted other rules at the start of 2025 that can affect your tax reporting. In the past, you were able to use a “universal” reporting method that looked at crypto holdings across all of your accounts. Now, you must report gains and losses on a “per wallet” basis. You can no longer pool gains and losses across all of your accounts. This new rule could lead to a different tax outcome than you would have encountered in prior years. At the wallet level, the IRS expects you to use the “First in First Out” method of accounting to track your gains and losses.
The IRS Has the Capacity to Track Your Crypto Activity
Even though crypto may have a reputation for being less traceable than other types of transactions, you should not assume that the IRS does not have a means to track your activity. Your broker (and other entities) have an obligation to make reports of your activity to the IRS, so they will at least have a basis to ask more questions of you and potentially issue a back tax assessment. As crypto gains more mainstream acceptance, the IRS is certainly “getting smarter,” and it could lead to more scrutiny of your tax returns if you hold a lot of crypto assets or frequently trade in them.
From your vantage point, accurate recordkeeping is a must. The last thing that you want and need is to have to perform a lot of work to get ready to file your taxes. Preparing ahead can help you file a timely and accurate tax return. Since crypto is a complex and rapidly changing area of tax law, it helps to get advice from an experienced New York tax attorney, so you know the latest tax rules and interpretations before you file. If you have any tax issues relating to crypto, you should certainly hire a lawyer for their advocacy.
Triggers for an IRS Audit for Your Crypto Activity
The IRS will ask you to disclose on your main Form 1040 whether you engaged in any crypto transactions in the prior year. If the answer is yes, you must use Form 8949 to report each individual transaction. You must also log your capital gains or losses on Schedule D of your tax return.
The IRS has AI tools that may flag your tax return for additional scrutiny of your crypto holdings and activity. The agency may be looking to flag the following as the basis for an audit:
- Frequent trading activity in crypto
- Cross-border transfers of crypto
- Participation in DAOs and DeFi protocols
- Unreported income based on your crypto holdings
Accordingly, if you are asking yourself the question “will the IRS know about my activity?” you should assume that the answer is yes. One unreported transaction could lead to additional scrutiny that may result in a large bill for back taxes and penalties.
Contact a New York Tax Attorney Today
New York tax lawyers at the Thorgood Law Firm are well-versed in the current regulations, and they can ease your burden when it comes time to file tax returns. If you are heavily engaged in crypto activity, you may be taking a risk if you try to handle your tax return on your own. You can speak with a trusted New York firm during a free consultation by visiting our website or by calling us today at (212) 490-0704.
