With IRS audits on the rise for 2025, cryptocurrency holders face more scrutiny than ever. It’s not just about paying taxes. The evolving rules mean even small oversights can lead to large penalties or expensive audits.
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Below are five common missteps that often catch crypto investors off guard — and how you can stay compliant.
Neglecting wallet-based accounting: The IRS now expects detailed reporting of each wallet’s transactions and balances. That means no more lumping all your trades together on a single spreadsheet. Whether you’re using hot wallets, cold wallets or a combination of both, each wallet’s records must be individually tracked. Tools like CoinTracking, CoinLedger or TaxBit can simplify this process by syncing real-time data from various exchanges. Proper wallet-based accounting not only keeps you compliant but also prevents surprises if the IRS decides to dig into your transaction history.
Misreporting staking rewards: Staking rewards are taxable income the moment they hit your wallet — even if you haven’t sold them for fiat. Many people mistakenly think they only have to report staking income at the time of sale, but the IRS disagrees. For instance, if you earn 2 ETH worth $3,000 total in staking rewards, that’s taxable income when received. Missing or misstating these amounts can draw unwanted attention from regulators who are already watching crypto activity closely.
Overlooking IRS letters and form 1099-DA: Key IRS notices like Notice 6371 (basically, “we have questions”), Notice 6374 (“explain yourself”) and CP2000 (“we think you owe us”) can arrive if something doesn’t line up in your tax filings. In 2025, crypto exchanges will also send Form 1099-DA, which outlines your crypto income, trades and rewards. Any discrepancy between this form and what you report is a surefire red flag. Always review these documents carefully for accuracy and be prepared to correct any errors before they escalate.
Failing to report all transactions: Think those small trades on a decentralized exchange are invisible? Think again. The IRS and its partners have sophisticated blockchain analysis tools that track activity, even on decentralized exchanges (DEXs) and privacy coins. Every single transaction — trades, airdrops, forks and rewards — must be included in your tax filing. “I forgot” won’t save you if your wallet addresses are linked to unreported transactions.
Missing the chance to adjust cost basis and avoiding excessive deductions: The 2025 tax year brings a critical opportunity to adjust your crypto cost basis under new guidelines. These rules allow investors to reallocate unused cost basis across wallets or exchange accounts, provided they document the method before their first 2025 trade and follow specific record keeping requirements. Done correctly, it can lower your capital gains tax and keep you in the clear. However, going too far with deductions — like inflating business expenses or hobby-related costs — can trigger an audit if numbers appear unrealistic. The IRS scrutinizes deductions that don’t align with typical income levels, so stay within reason and maintain thorough supporting records.
Staying audit-ready
Crypto taxation is increasingly complex, but staying compliant doesn’t have to be stressful. The best practices? Use reliable crypto tax software, double-check every detail on your return, keep meticulous records and be transparent if you discover past errors. A proactive approach helps ensure you’re ready for any IRS inquiry — and keeps your focus on what really matters: your crypto investments.
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