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IRS Data Reveals a Crypto Tax Blind Spot—And You Might Be In It
By Paul D. Diaz, EA, MBA | THE TAX CUTTERY® | January 4, 2026
New research shows who's actually reporting cryptocurrency to the IRS—and who isn't. A new study using IRS administrative data has revealed something that should concern any investor with significant cryptocurrency holdings: the tax system is capturing the wrong people.
The research, conducted by scholars at UNC Kenan-Flagler and published by the IRS Statistics of Income division, examined more than 17 million taxpayers who reported cryptocurrency sales between 2013 and 2021. What they found exposes a fundamental mismatch in how crypto compliance actually works—and creates both risk and opportunity for sophisticated investors.
The Numbers Tell a Surprising Story
Survey evidence suggests that 12–21% of American adults have held cryptocurrency at some point. But IRS filing data shows only about 6.5% of taxpayers actually report crypto transactions. That gap alone signals widespread under-reporting.
The more revealing finding is who is reporting. The typical crypto seller in IRS data is younger, has lower taxable income, and shows characteristics of retail speculation rather than sophisticated wealth management. These filers are less likely to itemize deductions, more likely to claim refundable credits like the Earned Income Tax Credit, and generally show modest gains from occasional trading.
In other words, the IRS is primarily seeing the 'dabblers'—not the serious investors.
The Compliance Paradox
Higher-income taxpayers with complex financial situations—exactly the individuals most likely to have substantial crypto positions—are disproportionately underrepresented in the reporting data.
Several factors contribute to this gap:
The paid preparer problem. The study found that increases in crypto reporting following the IRS's digital asset checkbox were concentrated among self-prepared returns. Taxpayers using consumer software who see the question directly are more likely to report their activity. Meanwhile, those using paid preparers—typically higher-income individuals—showed less improvement in reporting rates. This suggests that professional tax workflows may not consistently surface crypto activity, primarily when clients don't volunteer the information.
The checkbox isn't catching everyone. The digital asset question has been on returns since 2019. Still, the data reveals millions of mismatches: taxpayers checking 'yes' without reporting any transactions, and others reporting crypto activity while leaving the box unchecked. The checkbox functions more as a behavioral nudge than a robust compliance mechanism.
Limited third-party reporting—until now. Unlike stocks and bonds, cryptocurrency transactions have historically operated with minimal reporting to the IRS by brokers. Sophisticated investors with positions across multiple exchanges, DeFi protocols, and self-custody wallets have had little forcing them into compliance beyond the honor system.
The Landscape Is Changing Fast
The current enforcement environment disproportionately targets younger, lower-income retail traders who are already showing up in the data, rather than the high-value positions that remain invisible to the IRS.
That's about to change. The Form 1099-DA broker reporting regime begins implementation for the 2025 tax year, requiring centralized exchanges to report digital asset proceeds to the IRS. Cost basis reporting follows in subsequent years. The infrastructure for comprehensive third-party reporting is being built right now.
The window for voluntary compliance—for getting your crypto tax house in order before the IRS has full visibility—is closing.
What This Means for You
If you're a higher-income taxpayer with cryptocurrency holdings, the research suggests you may be in a population that's currently underrepresented in IRS reporting data. That might feel comfortable today, but it's precisely the situation that creates maximum exposure when enforcement catches up.
Consider these questions:
• Does your tax preparer specifically ask about digital asset activity each year, or do they rely on you to volunteer the information?
• Have you reported all taxable events, including crypto-to-crypto trades, staking rewards, airdrops, and DeFi transactions?
• Do you have documentation and cost basis records that would withstand an audit?
• Are your prior-year returns accurate and complete with respect to cryptocurrency?
The study's findings suggest that many sophisticated investors would answer 'no' to at least one of these questions—often because their preparers never asked, misunderstood what was reportable, or the compliance infrastructure didn't exist to track their activity.
Proactive Compliance Is the Only Strategy
At THE TAX CUTTERY®, we approach cryptocurrency tax compliance the same way we approach all tax matters: proactively, comprehensively, and with your long-term interests in mind.
That means:
• Asking the right questions about your complete digital asset picture, not waiting for you to bring it up
• Understanding complex transactions, including DeFi activity, NFTs, staking, lending, and cross-chain movements
• Reconstructing cost basis when exchange records are incomplete or unavailable
• Evaluating prior-year exposure and developing strategies to address any gaps before the IRS does
• Planning for the new reporting regime so your 2025 returns and beyond are built for the compliance environment that's coming
The question isn't whether your crypto activity will eventually become visible to the IRS. The question is whether you'll be prepared when it does.
———
THE TAX CUTTERY® provides comprehensive tax compliance, planning, and resolution services for clients nationwide. As an IRS Enrolled Agent with authority to represent taxpayers before all administrative levels of the IRS, Paul D. Diaz, EA, MBA, brings the technical expertise and practical experience needed to navigate complex digital asset tax situations.
Schedule a Crypto Tax Review: If you have questions about your cryptocurrency tax compliance, we're here to help. Contact us to schedule a consultation and ensure you're prepared for the new reporting environment.
Source:
Hoopes, J., Menzer, T., & Wilde, J. 'Who Reports Cryptocurrency to the IRS?' UNC Kenan-Flagler Business School / IRS Statistics of Income. Read the study →
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Securities offered through PFS Investments Inc., member FINRA & SIPC. Investment advisory services may be offered through PFS Investments Inc. or, where applicable, through a separately registered investment adviser. Paul D. Diaz is an IRS Enrolled Agent & IRS Certifying Acceptance Agent and provides ITIN/W-7, tax preparation, tax resolution, and tax advisory services through THE TAX CUTTERY®, an independent firm. Tax services are not offered through PFS Investments Inc. or its affiliates and are solely the responsibility of THE TAX CUTTERY®. This message is not intended as an offer or solicitation in any jurisdiction where such offer or solicitation would be unauthorized. All investments involve risk, including the potential loss of principal. Past performance is not indicative of future results.
Paul D. Diaz, EA, MBA, has unlimited representation rights before the Internal Revenue Service.