Can the IRS audit your cryptocurrency, and what will it already know?

Yes. Digital assets are property for federal tax purposes, so sales, trades and digital assets received as income are examined like any other item on a return. The IRS increasingly knows about them before an audit starts: every individual return asks a yes-or-no digital asset question, and brokers now report sales on Form 1099-DA, starting with gross proceeds for transactions on or after January 1, 2025 and adding cost basis for certain transactions on or after January 1, 2026.

What the IRS often does not have is your cost basis for older purchases, transfers between your own wallets, or activity at platforms that do not report. Those gaps are where audits and mismatch notices tend to focus, and where your own records decide the result. This page is part of Kathryn Meyer's guidance on IRS audits and examinations.

How a digital asset review usually unfolds

1. Matching. The IRS compares your return, including your answer to the digital asset question, with the Forms 1099-DA brokers file.
2. A letter. A mismatch can produce a CP2000 notice; a broader examination starts with an audit letter listing the years and items.
3. Requests for records. Examiners typically ask in writing for exchange histories, wallet details and basis records, often through an Information Document Request.
4. Outside evidence. The Internal Revenue Manual lists interviews, blockchain analysis and records obtained by summons as sources, so what you send can be checked against other data.
5. Proposed changes. The review ends with no change, an agreed adjustment, or proposed changes you can contest through the usual appeal steps.

What does the IRS treat as a digital asset?

The tax definition, added by the Infrastructure Investment and Jobs Act, covers any digital representation of value recorded on a cryptographically secured distributed ledger or similar technology. The IRS lists cryptocurrencies such as bitcoin, stablecoins and non-fungible tokens as examples. Because they are property, not currency, selling or exchanging them produces capital gain or loss when held for investment, and receiving them for goods or services in a business produces ordinary income.

What will the IRS already know?

The broker rules have limits. The final regulations do not require reporting by decentralized or non-custodial brokers that never take possession of the assets, and the IRS has temporarily excused brokers from reporting certain transactions, including staking, lending, wrapping and liquidity provider transactions, until further guidance. The IRS notes that this exception does not extend to rewards or other compensation earned in those transactions, and staking rewards are income you report.

Inside an audit, examiners have other tools. The Internal Revenue Manual tells IRS employees that evidence in digital asset cases can come from interviews, blockchain analysis, internal research and financial records provided by the taxpayer or obtained by summons. The rules for summonses sent to exchanges, banks and other third parties are covered in whether the IRS can contact your bank, clients or employer during an audit.

How do mismatch notices and audits start?

When a Form 1099-DA shows proceeds that do not appear on your return, the gap is the kind of discrepancy the IRS matching program looks for, and it can lead to a CP2000 notice proposing changes. For 2025 transactions the form reports gross proceeds, with basis reporting starting for certain 2026 transactions, so proceeds alone can overstate your gain. The answer is documentation of what you paid and when.

A full examination can reach further back. For years before 2025, there was usually no broker form at all, but the reporting duty was the same: the IRS's answers to frequently asked questions say income, gain or loss from all taxable virtual currency transactions must be reported, regardless of the amount or whether you received an information return. A large omission can also extend the assessment period to six years; see how far back the IRS can audit. If you find unreported transactions from earlier years, amended return or voluntary disclosure explains how a past mistake can be corrected.

What records should you have?

The IRS says that to compute gain or loss on each sale or exchange you need the type of digital asset, the date and time of the transaction, the number of units, the fair market value in U.S. dollars at the time, and your basis. Keep records of every purchase, receipt, sale, exchange or other disposition, and of the dollar value of any digital assets you received as income or as payment in a business. The Code and regulations require records sufficient to establish the positions taken on a return. If you hold or receive digital assets through a business, the general rules in what records the IRS requires to support business deductions apply as well.

Three points cause the most trouble in practice:

• Which units were sold. For transactions before 2025, the IRS FAQs allow specific identification of units if your records show the required details; otherwise units are treated as sold in first-in, first-out order. For 2025 onward, the final broker regulations call for basis to be tracked within each wallet or account, and Revenue Procedure 2024-28 gave transition rules for allocating unused basis to each wallet as of January 1, 2025.
• Transfers between your own wallets. These are not taxable, even if an exchange sends you an information return about the transfer, unless you pay a transaction fee in digital assets, which the IRS treats as a digital asset transaction.
• Income items. Staking, mining and similar rewards, and assets received for services, are ordinary income measured in dollars when received, reported on Schedule 1 or Schedule C depending on the activity.

When does a crypto audit become more serious?

The Internal Revenue Manual lists fraud indicators specific to digital assets, including intentionally leaving out transactions at some exchanges while reporting others, reporting only activity that appeared on an information return, using unhosted wallets to avoid reporting, overstating basis, and knowingly answering "No" to the digital asset question. The manual also notes that the IRS has repeatedly told taxpayers, through notices and releases going back to 2014, that these transactions must be reported. Examiners can point to that history when a taxpayer says they did not know. Our page on the warning signs that a civil IRS audit could turn criminal explains how examiners handle those indicators.

A practical warning: the IRS says letters asking you to register your cryptocurrency on a "Digital Assets Compliance Portal," often with a QR code, are a scam. The IRS does not require registration of digital assets.

What changes the answer

• How long you held the asset. One year or less produces short-term gain or loss; more than one year, long-term (IRS FAQs).
• How you got it. Assets received for services are ordinary income at their dollar value when received; a bona fide gift is not income until you dispose of it, and your basis generally carries over from the donor.
• What you did with it. Exchanging one digital asset for another, or paying for goods or services with it, is a taxable disposition. Donating it to a qualifying charity does not produce gain or loss.
• Forks. An airdrop of new cryptocurrency after a hard fork is ordinary income when you gain control of it; a soft fork produces no income.
• Who paid you, and how. Digital assets paid to an independent contractor are self-employment income, and those paid as wages are subject to employment taxes (IRS FAQs).
• Your records. Specific identification of units is available only if your records substantiate them; otherwise first-in, first-out applies.

For example: proceeds without basis

For example, suppose an investor sold units of bitcoin on an exchange in 2025 and received a Form 1099-DA showing $50,000 of gross proceeds and no basis. Her records show she bought those units more than a year earlier for $40,200, plus $800 in purchase fees. Under the IRS FAQs her basis includes the fees, so it is $41,000, and her gain is $9,000, long-term because she held the units more than one year. She reports the sale on Form 8949.

If she had left the sale off her return, a CP2000 built on the $50,000 of proceeds could arrive. Her reply would show the purchase records, the fees and the dates that support the $41,000 basis. Without those records, proving the lower gain becomes much harder. This is a hypothetical, not a real case.

Common mistakes with digital assets

• Treating a coin-for-coin swap as tax-free. The IRS treats it as a disposition with gain or loss.
• Answering the return question "No" after a sale or swap. Only holding, buying with dollars, or moving assets between your own wallets permits "No".
• Leaving out rewards because no form arrived. Income must be reported regardless of the amount or any information return.
• Losing purchase records. Proceeds are reported to the IRS; your basis may not be.
• Answering a "compliance portal" letter. The IRS says those letters are scams.

What to do this week

1. Download the full transaction history from every exchange and platform you used, including closed accounts if you still can.
2. List every wallet address you control and which assets each holds.
3. Collect each Form 1099-DA and compare its proceeds with what your returns reported.
4. Rebuild basis for each sale from purchase records, including fees, and note the holding period.
5. Check how you answered the digital asset question each year.
6. If an IRS letter has arrived, note its response date before doing anything else.

Frequently asked questions

Do you have to answer "Yes" if you only bought and held?

No. The IRS says to check "No" if you only owned or held digital assets, purchased them with real currency without selling, or moved them between wallets you own (unless you paid a fee in digital assets).

Is swapping one cryptocurrency for another taxable?

Yes. The IRS FAQs treat an exchange of virtual currency for other property, including another virtual currency, as producing capital gain or loss measured by the fair market value of what you received.

Is crypto you received as a gift taxable?

Not when received. You recognize gain or loss only when you dispose of it, and the donor's basis and holding period generally carry over if you can document them.

Does it matter if you pay workers in crypto?

Yes. The IRS says the form of payment does not change whether remuneration is wages for employment tax purposes, so classification still decides the tax; see what happens in an IRS worker classification audit.

Can penalties apply to unreported crypto?

Yes. Leaving off income shown on an information return is one of the IRS's examples of possible negligence; see what penalties the IRS can add after an audit.

What happens if the audit ends in disagreement?

The examiner sends proposed changes with appeal rights. See what to do with an IRS 30-day letter.

Getting help with a digital asset audit or notice

Digital asset cases are won or lost on reconstruction: exchange histories, wallet addresses, transfer records and valuations that tie to each line of the return. Kathryn Meyer can review what the IRS has, what it is asking for, and how to present your records. Contact the firm or call (571) 560-8674 to discuss your situation.

Sources

• IRS, Digital assets
• IRS, About Form 1099-DA, Digital Asset Proceeds From Broker Transactions
• IRS, Frequently asked questions on virtual currency transactions
• Internal Revenue Manual 25.1.2, Recognizing and Developing Fraud (sections 25.1.2.3 and 25.1.2.11)
• IRS, Understanding your CP2000 series notice
• 26 U.S.C. 6001, Notice or regulations requiring records, statements, and special returns