Trying to evade cryptocurrency taxes is a bad idea.
As the cryptocurrency ecosystem has grown in size, the federal government has dedicated more resources to crack down on crypto tax fraud.
In this guide, we’ll break down everything you need to know about how the IRS tracks cryptocurrency transactions. We’ll also share a simple method that can help you report your cryptocurrency on your tax return in minutes.
Is Bitcoin Traceable?
Yes, Bitcoin is traceable. All transactions are recorded on a public ledger (the blockchain), enabling governments and law enforcement agencies to track funds.
Here are a few examples of the federal government tracing BTC transactions:
- FBI Seizure of Silk Road Bitcoin: In 2013, the FBI tracked and seized over 170,000 BTC linked to online marketplace Silk Road by analyzing blockchain data and identifying wallets associated with illegal activities.
- Colonial Pipeline Ransomware Case: In 2021, the U.S. Department of Justice recovered $2.3 million in Bitcoin paid to hackers by tracing the ransom through wallet addresses and exploiting weak security.
- IRS Crypto Investigations: The IRS has worked with contractors like Chainalysis to analyze blockchain data, uncover tax evasion schemes and track unreported cryptocurrency income.
Can the IRS track anonymous wallets?
Because cryptocurrency transactions are pseudo-anonymous, many investors believe that they cannot be traced. This is not true.
Most major blockchains have publicly visible transactions. That means that the IRS can track crypto transactions simply by matching ‘anonymous’ transactions to known individuals.
In recent years, the IRS has increased its budget to deal with tax fraud. In 2021, the IRS launched ‘Operation Hidden Treasure’ — a partnership between the IRS’s Office of Fraud Enforcement and Criminal Investigation Division aimed specifically at tax evasion on the blockchain.
In 2022, the IRS was granted an $80 billion budget increase to add 87,000 new agents, giving the agency more resources to crack down on crypto tax fraud.
Do major exchanges report to the IRS?
If you’ve signed up with a cryptocurrency exchange, you’ve likely given personal information such as your name, date of birth, and a copy of your personal ID. Major exchanges that operate within the United States are required by law to collect this information due to Know Your Customer (KYC) regulations.
When you sign up for major exchanges, you are required to provide the following information:
- Name
- Date of Birth
- A photo of yourself alongside ID
The IRS can and has requested these records from exchanges. In the past, the IRS has issued John Doe Summons to exchanges like Coinbase and Kraken.
In addition, major exchanges issue 1099 forms to customers and to the IRS reporting on your crypto transaction activity. If you don’t report transactions that have been reported to the IRS via Form 1099, you may automatically be sent a warning letter about your unpaid tax liability.
In the future, the IRS will have even more information about cryptocurrency investors at its disposal. Starting in 2026, major exchanges operating in the United States will be required to report all customer cryptocurrency disposals to the IRS.
Which crypto exchanges report to the IRS?
Most major exchanges operating in the US issue 1099 forms to customers. Exchanges that issue 1099 forms include, but are not limited to, the following:
- Coinbase
- Kraken
- Gemini
- Crypto.com
- Binance.US
- Robinhood
- PayPal
Which crypto exchanges do not report to the IRS?
Here are a few cryptocurrency exchanges that don’t require Know Your Customer information from customers and do not send 1099 forms.
It’s important to remember that the list of non-KYC exchanges is rapidly shrinking. In 2026, all centralized and decentralized exchanges in the United States will be required to take KYC information and report customer transactions to the IRS.
Can I hide my cryptocurrency in a decentralized wallet?
While decentralized wallets do not require KYC information, it’s not recommended to use them to hide your cryptocurrency from the IRS.
If you’ve made transfers between your wallet and a centralized exchange account that is linked to your identity, it’s likely that the IRS will be able to identify your wallet address.
The best course of action is to pay your tax bill. The alternative is to face penalties or even jail time.
Why does the IRS ask if I own cryptocurrency?
In recent years, the IRS has increased scrutiny on cryptocurrency transactions. In 2020, a new question was added to Form 1040 that specifically asked taxpayers if they transacted in cryptocurrency during the tax year.
According to tax experts, it’s likely that the IRS is asking this question to gather more information about the digital asset ecosystem. Remember, answering ‘Yes’ to this question will not increase your crypto tax liability.
On the other hand, not answering this question truthfully is a red-flag to the IRS. It’s possible that lying on this question may increase the risk of IRS scrutiny.
How can I hide my cryptocurrency from the IRS?
Trying to hide your cryptocurrency from the IRS is a bad idea.
Remember, tax evasion is a felony. The maximum penalty for tax evasion is 5 years in prison and up to $100,000 in fines plus the cost of prosecution.
Instead of trying to hide your cryptocurrency, check out our guide to avoiding crypto taxes legally.
Can the IRS audit me for cryptocurrency?
The IRS can audit you if they have reason to believe that you are underreporting your taxable income from cryptocurrency.
Typically, the limit for conducting an audit is three years after a taxpayer has filed their tax return. In cases of fraud, there is no limit to how far the IRS can go back in a tax audit.
Can the IRS track NFTs?
Just like cryptocurrency transactions, NFT transactions on blockchains like Ethereum are publicly visible. The IRS can use the same methods it uses to identify ‘anonymous’ wallets to identify ‘anonymous’ NFT holders.
Which crypto exchanges do not report to the IRS?
Currently, centralized exchanges like KuCoin and decentralized exchanges like Uniswap do not collect KYC (Know Your Customer) information from users.
However, it’s important to remember that exchange policies may change in the future as the U.S. government cracks down on crypto tax evasion. In recent years, exchanges like Binance have introduced KYC policies in response to government pressure.
For more information, check out our list of non-KYC exchanges.
What should I do if I forgot to report my cryptocurrency in previous years?
If you didn’t report cryptocurrency on your tax return in previous years, it’s recommended that you file an amended tax return. The IRS is more lenient to those who make a good-faith effort to pay their taxes.
How do I report cryptocurrency on my taxes?
Cryptocurrency capital gains should be reported on Form 8949. You are required to include the date you acquired and disposed of your cryptocurrency, as well as your cost basis and proceeds from the disposal.
Individual investors report ordinary income from cryptocurrency on Schedule 1 of Form 1040.
For more information, check out our guide to reporting cryptocurrency on your tax return.
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