With the rise in IRS audits in 2025, cryptocurrency holders are facing more scrutiny than ever before. It’s not just about paying taxes. Evolving rules mean that even a small amount of surveillance can lead to large penalties and expensive audits.
I’m reading Crypto Long & Short. This is a weekly newsletter featuring insights, news and analytics for professional investors. Sign up here to get it every Wednesday in your inbox.
Below are five common mistakes that often break crypto investors off guard, and how you can maintain compliance.
Ignoring wallet-based accounting: The IRS expects detailed reports of transactions and balances for each wallet. This means that you won’t be able to combine all your transactions together in one spreadsheet anymore. Whether you are using a hot wallet, a cold wallet, or a combination of both, records for each wallet must be tracked individually. Tools like Cointracking, Coinledger, and Taxbit can simplify this process by synchronizing real-time data from various exchanges. A proper wallet-based accounting will not only keep you adhering to, but also prevent surprises if the IRS decides to dig into your transaction history.
Incorrectly report rewards for false rewards: Even if you’re not selling your wallet, the moment they hit your wallet, staking of rewards is taxable income. Many people mistakenly believe that they only report their staking income at the time of sale, but the IRS disagrees. For example, if you earn two ETHs worth a total of $3,000 in your interest, that is your taxable income when you receive it. Losing or mistakeing these amounts can draw unnecessary attention from regulators who already have a close eye on cryptographic activity.
Overlooking the IRS letter, you can arrive if you have any major IRS notifications like Form 1099-DA: Notice 6371 (basically “I have a question”), Notice 6374 (“Explanation”), CP2000 (“I think we owe”) if there is nothing in place on your tax return. In 2025, the Crypto Exchange will also submit Form 1099-DA. This outlines crypto income, transactions and rewards. The inconsistency between this form and what you report is a sure red flag. Always check these documents carefully for accuracy and be prepared to correct any errors before escalating.
Do you think you can’t see these small transactions in a decentralized exchange unless you report all the transactions? Think about it again. The IRS and its partners have sophisticated blockchain analytics tools that track activity, even Decentralized Exchange (DEX) and privacy coins. All transactions – transactions, airdrops, forks, and rewards – must be included in your tax return. “Forgotten” will not save you if the wallet address is linked to an unreported transaction.
The story continues