Can the IRS Track My Crypto?

I get asked this question constantly. In consultations, on calls, in panicked emails: Can the IRS actually track my crypto?

The short answer is yes. Unequivocally yes.

But what surprises most people isn't that the IRS can track crypto—it's how sophisticated their methods have become, how much data they already have, and how many of my clients discovered this the hard way.

Let me walk you through what I've seen.

The Myth of Crypto Anonymity

Here's something I find myself explaining in almost every new client meeting: Bitcoin is not anonymous. It's pseudonymous. There's a critical difference.

Every single Bitcoin transaction—wallet addresses, amounts, timestamps—is recorded on a public, distributed ledger. Anyone can view it. The IRS can view it. Blockchain explorers make this trivially easy.

The same is true for Ethereum, Solana, and virtually every major chain except dedicated privacy coins like Monero. The blockchain is transparent by design. It's one of the core tenets of the technology.

I had a client last year—let's call him Daniel—who ran a fairly active trading operation across Coinbase, Kraken, and a self-custody wallet. He'd accumulated positions in BTC, ETH, and a handful of Solana-based tokens during the 2021 bull run. Someone had told him crypto was "untraceable," and he took that at face value. He figured the IRS had bigger fish to fry.

For three years, Daniel didn't report any of his crypto activity. Not the $40,000 gain he realized swapping ETH for stablecoins. Not the staking rewards that hit his wallet weekly. Nothing.

Then a CP2000 notice arrived. The IRS had received 1099 data from Coinbase showing proceeds that didn't appear anywhere on Daniel's returns. The letter included a proposed assessment for taxes owed, plus accuracy penalties and interest. By the time he walked into my office, the number on that letter had grown to nearly six figures.

Daniel isn't unusual. A lot of people assume that because their wallet address doesn't display their name, they're invisible. They're not. And the IRS doesn't need to catch you in real-time—they just need one data point that connects your identity to unreported activity.

How the IRS Actually Tracks Crypto

The IRS doesn't rely on a single method. They've built a multi-layered system that combines:

1. Direct reporting from exchanges

Every US-based crypto exchange that operates legally must collect KYC (Know Your Customer) information and report user activity to the IRS. Starting with the 2025 tax year, this now happens via Form 1099-DA, which reports gross proceeds from digital asset transactions. Exchanges also issue 1099-MISC for income like staking rewards and referral bonuses.

This data goes to both you and the IRS. If what you report doesn't match what they receive, automated systems flag the discrepancy.

2. Blockchain analytics partnerships

The IRS has contracted with firms like Chainalysis for years. These aren't small engagements—the IRS Criminal Investigation unit alone has spent millions on Chainalysis tools and training.

What does Chainalysis do? Their software can trace transactions across wallets, identify patterns, cluster addresses that likely belong to the same person, and even track funds across different blockchains. In 2020, the IRS awarded contracts specifically aimed at tracing Monero transactions and Lightning Network activity. Privacy isn't what it used to be.

3. John Doe summonses

This is the heavy artillery. A John Doe summons allows the IRS to demand customer records from an exchange for an entire class of users—not a specific individual, but everyone meeting certain criteria.

The IRS has successfully obtained John Doe summonses against Coinbase (2016), Kraken (2021), and Circle/Poloniex (2021). In the Kraken case, they got records for all US users who transacted $20,000 or more in any year between 2016 and 2020. That's account registration data, transaction history, IP addresses, linked bank accounts—everything.

4. Operation Hidden Treasure

In March 2021, the IRS launched Operation Hidden Treasure, a joint initiative between the Office of Fraud Enforcement and the Criminal Investigation division. Their explicit goal: find unreported crypto income.

IRS National Fraud Counsel Carolyn Schenck put it bluntly at the Federal Bar Association conference: "These transactions are not anonymous. We see you."

That's not posturing. They've backed it up with resources, training, and an increasingly long list of prosecutions.

Which Exchanges Report to the IRS?

There's no official public list, but any crypto exchange lawfully operating in the US shares information with the IRS. This includes:

• Coinbase
• Kraken
• Gemini
• Binance US
• Crypto.com
• Robinhood Crypto
• eToro
• PayPal Crypto
• Bitstamp
• Uphold

Exchanges typically issue 1099 forms in January or February following the tax year.

If you're using a US-based exchange and you're a US person, the IRS knows about your activity. Full stop.

Does Coinbase Report to the IRS?

This is one of the most searched questions I see, so let me be direct: yes, Coinbase reports to the IRS.

Coinbase was actually the first major exchange the IRS went after. Back in 2016, the IRS served Coinbase with a John Doe summons demanding records on all US users. Coinbase pushed back on the scope, but ultimately the court ordered them to turn over data on approximately 13,000 customers who had transacted more than $20,000 in any single year between 2013 and 2015.

That was nearly a decade ago. Since then, Coinbase's reporting has only expanded.

Today, Coinbase issues:

• Form 1099-MISC for users who earn $600+ in staking rewards, referral bonuses, or other crypto income
• Form 1099-DA (starting with 2025 transactions) reporting gross proceeds from all digital asset sales and exchanges

When Coinbase sends you a 1099, they send an identical copy to the IRS. If the numbers on your tax return don't match, the IRS's automated systems will flag the discrepancy, often resulting in a CP2000 notice.

I've had multiple clients come to me after receiving IRS correspondence that traced directly back to Coinbase data. In one case, a client had transferred BTC from Coinbase to a personal wallet, then sold it months later through a different exchange. He assumed moving the coins "broke the chain." It didn't. Coinbase had already reported the withdrawal, and when the IRS cross-referenced that with the absence of any corresponding sale on his return, they sent a letter.

The bottom line: if you've used Coinbase at any point, the IRS has data on you. The same applies to Kraken, Gemini, Crypto.com, and every other major US exchange. Don't assume otherwise.

"What About Non-US Exchanges?"

This is where I see people get into real trouble.

I've had clients who thought using a non-US exchange would keep them off the IRS radar. Some used KuCoin or MEXC before those platforms restricted US access. Others have tried to maintain accounts on offshore exchanges using VPNs or foreign addresses.

Here's what they don't realize:

First, many formerly "no-KYC" exchanges have either withdrawn US services or implemented KYC requirements. KuCoin and MEXC, for example, have blocked US users. If you're still accessing these platforms from the US, your account can be frozen at any time.

Second, the IRS has international reach. They participate in the Joint Chiefs of Global Tax Enforcement (J5), a coalition of tax authorities from the US, UK, Australia, Canada, and the Netherlands specifically targeting crypto tax evasion. They share data.

Third, the moment you move funds back to a US exchange, cash out through a US bank, or otherwise touch the US financial system, you've created a trail.

I had a client, a US citizen living part-time in Dubai, who ran substantial trading activity through offshore accounts, thinking the geographical separation protected him. He'd been trading on non-US platforms, holding assets in foreign wallets, keeping everything outside the American financial system. For five years, it seemed to work.

Then he decided to move profits back to the US to buy property. He wired funds to his US bank account, made a down payment, and thought nothing of it.

What he didn't realize: that wire triggered Bank Secrecy Act reporting. His bank filed a Currency Transaction Report. The IRS now had visibility into funds that, when traced backward, connected to unreported crypto gains across multiple years.

We spent months reconstructing his complete transaction history, piecing together records from exchanges that no longer existed, wallet activity across three different blockchains, DeFi positions he'd half-forgotten about. He ended up filing amended returns for four years, paying substantial back taxes, and negotiating penalty abatement. It was a challenging process, but the outcome could have been worse.

The IRS doesn't need to see every transaction in real-time. They just need enough connection points to build a case. And those connection points are everywhere.

Can You Be Linked to a Non-Custodial Wallet?

A lot of people believe self-custody wallets are untraceable. They're not—at least, not completely.

Here's how you get linked:

On-ramps and off-ramps. If you ever moved crypto between your self-custody wallet and a centralized exchange, that exchange has your wallet address in their records. When the IRS requests data, wallet addresses are part of what they receive.

Purchasing crypto with a card. Some wallets let you buy crypto directly with a credit or debit card. Convenient, but it ties your bank account to the wallet. Banks report to the IRS.

Wallet data collection. This one surprises people. MetaMask's privacy policy, for example, allows them to collect IP addresses and Ethereum addresses during transactions. You might be using a "non-custodial" wallet while still generating a data trail.

Blockchain analysis. Chainalysis and similar tools can cluster addresses, trace transaction flows, and identify patterns. If one address in a cluster is identified, the others become suspect.

I tell clients: assume that every wallet you've ever used can potentially be connected back to you. Act accordingly.

IRS Crypto Tax Letters: 6173, 6174, and 6174-A

If the IRS suspects you have unreported crypto activity, they don't always jump straight to an audit. Often, they start with a letter.

Since 2019, the IRS has sent tens of thousands of cryptocurrency-related letters to taxpayers. These come in three main varieties, and understanding the difference matters:

Letter 6174 is the least serious—essentially an educational notice. It says the IRS knows you may have cryptocurrency and reminds you of your reporting obligations. No response is required, and the IRS typically won't follow up. Think of it as a tap on the shoulder.

Letter 6174-A is more pointed. It suggests the IRS has specific information indicating you may have underreported crypto income. While no response is technically required, the letter warns that "we may send other correspondence about potential enforcement activity in the future." Translation: they're watching. This is your window to correct any mistakes before things escalate.

Letter 6173 is serious. This letter explicitly states the IRS believes you failed to meet your tax filing and reporting obligations for cryptocurrency transactions. It requires a response by a specific deadline. If you don't respond, the IRS may refer your account for examination—which is IRS-speak for audit.

I've worked with clients who received all three types. The pattern I see: people who get 6174 or 6174-A and ignore the warning often end up with something worse down the line—a CP2000 notice, a full audit, or in extreme cases, a referral to Criminal Investigation.

The letters themselves come from data the IRS already has: exchange 1099s, John Doe summons responses, and increasingly, blockchain analytics. If you receive one, it means you're on their radar. The question is what you do next.

My advice: treat any IRS crypto letter as an opportunity to get right before things escalate. Review your returns. Identify gaps. Amend if necessary. The clients who take this seriously almost always end up in a better position than those who wait.

What Happens If You Don't Report?

This is where it gets serious.

The IRS treats crypto as property. Every sale, swap, or disposal is a potentially taxable event. Failure to report can result in:

• Audits and back taxes going back years
• Accuracy-related penalties (typically 20% of the underpayment)
• Failure-to-file penalties (5% per month, up to 25%)
• Interest on unpaid amounts, compounding daily
• Criminal prosecution in cases of willful evasion

The standard statute of limitations for an IRS audit is three years. But if you've overstated your cost basis by 25% or more, they have six years. And if they believe you've committed fraud? There's no limit.

I've seen clients face all of these consequences. The ones who come to me early—before receiving an IRS notice—have options. The ones who wait until they're under audit have far fewer.

"I Forgot to Report Crypto on My Taxes. What Do I Do?"

Whether you genuinely forgot or you "forgot," here's the reality: the best path forward is voluntary correction.

You can amend prior tax returns using Form 1040X. You have three years from the original filing date to submit an amended return. The IRS is significantly more lenient with taxpayers who proactively correct errors than with those who wait to get caught.

If the situation is more serious—if you deliberately underreported or avoided reporting entirely—the IRS recently updated Form 14457 to include a section on virtual currency. This is the Voluntary Disclosure Practice, which allows taxpayers facing potential criminal liability to come forward, disclose the information, and typically avoid prosecution in exchange for paying what's owed plus penalties.

I've walked clients through both processes. Neither is pleasant, but both are far better than the alternative.

What the IRS Wants You to Report

For every crypto transaction, the IRS expects:

• The date of the transaction
• Your cost basis (what you paid, in USD, on the day you acquired it)
• The fair market value at disposal (in USD, on the day you sold/swapped/spent it)
• The capital gain or loss
• The nature of the transaction and parties involved
• Records of transfers between wallets and exchanges

This gets reported on Form 8949 and Schedule D for capital gains/losses, and Schedule 1 or Schedule C for income (staking, mining, referral bonuses, etc.).

And starting in 2025, you'll receive Form 1099-DA from exchanges showing your gross proceeds—which the IRS will use to cross-reference against what you report.

The 1099-DA Risk Factor

Form 1099-DA deserves its own discussion because it fundamentally changes the enforcement landscape.

Before 2025, crypto exchanges reported inconsistently. Some issued 1099-K (which created confusion because it reported gross transaction volume, not taxable income). Some issued 1099-MISC for staking rewards. Many reported nothing at all for trading activity. The IRS had to work harder to identify non-compliance.

That era is over.

Starting with the 2025 tax year, every custodial crypto exchange must issue Form 1099-DA reporting gross proceeds from your digital asset sales and exchanges. This form goes to you—and to the IRS.

Here's why this matters:

The IRS will now have automated matching. When you file your return, their systems will compare what you reported against the 1099-DA data they received. Discrepancies get flagged automatically. You don't need to be selected for audit—the mismatch itself triggers correspondence.

Gross proceeds ≠ taxable gain. The 1099-DA shows what you received from sales, not your actual profit. If you bought 1 BTC for $60,000 and sold it for $65,000, your taxable gain is $5,000—but the 1099-DA reports $65,000. If you don't properly account for cost basis, the IRS may assume the entire proceeds are taxable.

Cost basis isn't required until 2026. For 2025 transactions, exchanges only report gross proceeds. They're not required to report your cost basis until 2026—and even then, only for assets acquired and held entirely within their platform. If you transferred crypto in from another exchange or wallet, that cost basis won't appear on your 1099-DA.

Transferred assets create problems. Let's say you bought ETH on Kraken, transferred it to Coinbase, and later sold it on Coinbase. Coinbase doesn't know what you paid for that ETH. Their 1099-DA will show the sale proceeds with no cost basis—which could make it look like 100% of the proceeds are gain. You'll need your own records to prove otherwise.

I'm already seeing clients panic about this. The ones who kept good records are fine. The ones who didn't are facing a significant reconciliation project before April.

For complete details on Form 1099-DA requirements, the 2025 reporting timeline, and how to prepare, see our 2026 US Crypto Tax Guide.

Can the IRS track crypto

So, can the IRS track your crypto? Yes. And they're getting better at it every year.

The combination of mandatory exchange reporting, blockchain analytics tools, John Doe summonses, and dedicated enforcement operations like Hidden Treasure means the window for flying under the radar has essentially closed.

Every client I work with who assumed they were invisible eventually discovered they weren't. The question isn't whether the IRS can find you—it's whether you've gotten your records in order before they come looking.

If your crypto taxes are complicated, spread across multiple exchanges and wallets, or if you have years of unreported activity, this is exactly the kind of situation we handle at CountDefi. We reconstruct complete transaction histories, reconcile the data, and prepare filings that can withstand IRS scrutiny.

The best time to get compliant was yesterday. The second-best time is now.

Need Help Getting Your Crypto Taxes in Order?

If you've got a complicated history, years of unreported activity, or just want the confidence that your filings are audit-ready, reach out to CountDefi. This is what we do.

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