With the increasing IRS audits by 2025, cryptocurrency holders face more scrutiny than ever. It’s not just about paying taxes. Evolutionary rules mean that even small supervision can lead to large sanctions or expensive audits.
You are reading Crypto Long & Short, our weekly newsletter with ideas, news and analysis for the professional investor. Register here to get it on your entrance tray every Wednesday.
Below are five common false steps that often catch unsuspecting cryptographic investors, and how it can be maintained.
- Neglect accounting based on the wallet: The IRS now expects detailed reports of the transactions and balances of each wallet. That means that no more group all its operations on a single spreadsheet. Whether you are using hot wallets, cold wallets or a combination of both, the records of each wallet must be tracked individually. Tools such as Condracking, Coinledger or Taxbit can simplify this process Synchronizing real -time data of several exchanges. Proper accounting based on the wallet not only keeps it complying, but also avoids surprises if the IRS decides to deepen its transaction history.
- Inform bad rewards: The rethinking rewards are taxable income at the time they hit their wallet, even if it has not sold them for Fiat. Many people mistakenly think that they only have to inform income from participation at the time of sale, but the IRS does not agree. For example, if it wins 2 eth worth $ 3,000 in total in betting rewards, that is an taxable income when received. Missing or erroneously declare these amounts can attract the unwanted attention of regulators who are already observing cryptographic activity.
- With views of the letters of the IRS and the form 1099-DA: Key IRS notices such as notice 6371 (basically, “we have questions”), notice 6374 (“Explain”) and CP2000 (“We believe you owe us”) can reach if something does not align in your tax files. In 2025, encryption exchanges will also send form 1099-DA, which describes their income, operations and cryptography rewards. Any discrepancy between this form and what it reports is a safe red flag. Always check these documents carefully to obtain precision and prepare to correct any error before they intensify.
- Do not inform all transactions: Do you think those small trades in a decentralized exchange are invisible? Think again. The IRS and its partners have sophisticated blockchain analysis tools that track the activity, even in decentralized exchanges (DEX) and privacy coins. Each transaction (trades, airdrops, holders and rewards) must be included in its tax presentation. “I forgot” it will not save you if your wallet addresses are linked to unrelated transactions.
- The opportunity to adjust the cost base and avoid excessive deductions: Fiscal year 2025 provides a critical opportunity to adjust its cryptographic cost under new guidelines. These rules allow investors to reassign the costs not used in wallets or exchange accounts, provided that the method before their first 2025 trade and follow the specific requirements maintenance requirements. Made correctly, you can reduce your capital gains tax and keep it clear. However, going too far with deductions, such as inflating commercial expenses or costs related to hobby, can trigger an audit if numbers do not seem unrealistic. The IRS analyzes the deductions that are not aligned with the typical income levels, so it remains within the reasonable and maintain exhaustive support records.
Stay ready for audit
Cryptographic taxes are increasingly complex, but maintaining compliance does not have to be stressful. Best practices? Use reliable cryptographic tax software, check every detail in your return, keep meticulous records and be transparent if you discover past errors. A proactive approach helps to ensure that it is ready for any IRS consultation, and keeps its focus on what really matters: its cryptographic investments.
See here to see the full article and a more detailed guide.
