The IRS has cryptocurrency in its crosshairs, and taxpayers maneuvering the digital asset landscape face an increasingly sophisticated audit machine.
While Bitcoin may feel like the Wild West to some investors, the tax sheriff has been building quite the sophisticated tracking system.
The days of crypto flying under the radar are about as gone as those Bitcoin you wish you’d bought in 2010.
Missing or inaccurate reporting tops the list of attention-grabbers.
Unreported crypto income—whether from sales, exchanges, or mining—practically sends the IRS a digital invitation to audit.
Similarly, discrepancies between exchange-issued 1099 forms and what appears on tax returns create the kind of red flag that makes auditors perk up like a cat spotting a laser pointer.
Poor recordkeeping creates another major vulnerability.
The 2025 rules demand transaction documentation that would impress a forensic accountant.
Tracking trades on a coffee-stained napkin (or the digital equivalent—a basic spreadsheet) simply won’t cut it anymore.
Without proper wallet identification records and supporting documentation, explaining your crypto journey to an auditor becomes about as easy as explaining blockchain to your grandmother.
Proper record-keeping systems are essential for new investors to maintain compliance and avoid triggering unnecessary audits.
Large or suspicious transactions constitute the third warning sign.
Unexplained high-value crypto movements between wallets without clear documentation might as well be accompanied by a neon sign reading “Audit Me!”
The IRS has particularly keen interest in structuring—breaking transactions into smaller amounts to avoid reporting thresholds—which they view with the same suspicion as a dog eyeing the empty treat jar next to your guilty-looking toddler.
Purchasing expensive items or luxury goods using cryptocurrency will also attract IRS attention, creating a digital paper trail that auditors actively look for during reviews.
Errors in cost basis calculations and valuations represent another critical pitfall.
Improper calculations or estimating values instead of using actual fair market prices creates discrepancies that algorithms can spot faster than you can say “tax evasion.”
Failing to account for staking rewards as income when received in your wallet is a common mistake that immediately raises red flags with auditors.
Finally, high incomes paired with frequent trading activity draw extra scrutiny.
Those earning over $400,000 annually with substantial crypto involvement find themselves under the IRS’s magnifying glass, especially when juggling multiple income streams from staking, mining, and trading.
