David Klasing, a California tax attorney, remembers meeting a client whose early cryptocurrency holdings had grown to $700 million in eight years, and because he had never declared a cent, he was losing sleep over being jailed for tax fraud.
Klasing says he recommended the client complete a voluntary declaration, a penalty reduction program for taxpayers who intentionally fail to declare their foreign assets. By coming forward proactively, they would avoid criminal prosecution.
“That’s the solution for anyone holding large amounts of undeclared cryptocurrency,” Klasing said in an interview. “People come to me daily who are now reading about the new reporting requirements the government is trying to implement with foreign exchange, and who haven’t reported anything in eons.”
There is no doubt that if you have amassed significant unreported profits from cryptocurrencies held overseas, tax authorities in the US, Europe and many other jurisdictions are now on your trail. The Crypto Asset Reporting Framework (CARF), which went live in several jurisdictions this month, was designed to align global reporting standards and essentially forces foreign brokerages and exchanges to open their kimonos to tax authorities.
“I hope to see many countries take the CARF as inspiration to establish their own national reporting requirements,” said Colby Mangels, head of government solutions at crypto tax compliance firm Taxbit, “We will also see a lot more people educate themselves about crypto tax compliance. Because if you don’t report it, the authorities will find out what’s going on and that will be worse.”
The tax collector comes
It was already true that US taxpayers with cryptocurrencies in foreign accounts had to report their holdings to the IRS above certain thresholds. Foreign Bank Account Reporting (FBAR) requirements apply to accounts over $10,000, while a Foreign Account Tax Compliance Act (FATCA) form must be completed for foreign assets ranging from $50,000 to over $100,000.
Of course, cryptocurrencies were designed to stay out of the sight of governments, which means it’s taken some time: bitcoin It first appeared in 2009, to familiarize tax authorities with the asset class, not to mention the global patchwork of exchanges and trading platforms. But it’s a process that has steadily advanced, Klasing said, dating back to when the IRS questioned Swiss banking secrecy in the mid-1990s.
Back then, the agency issued a John Doe subpoena to Swiss wealth management powerhouse UBS to obtain the names of U.S. taxpayers with unreported accounts between 2002 and 2007. You can see similarities between numbered bank accounts and the alphanumeric keys that control cryptocurrencies, with the obvious exception that anyone can receive the latter.
‘Money in a suitcase’
While cryptocurrency exchanges and brokerages are now asked to provide authorities with account information in a way that does not harm investors, Klasing says he is encountering people who are using techniques such as decentralized finance (DeFi) to cover their tracks.
“They believe the paper trail behind DeFi is harder for the government to follow or untraceable. Many of them are using mixers and doing everything they can to not report cryptocurrencies,” Klasing said.
Taxbit’s Mangels remembers working on the first version of the U.S. Common Foreign Account Tax Reporting Standard (FATCA CRS), which was implemented in 2010 and focused on “old-school money laundering and tax evasion,” he said.
“The original setting is from the days when you had to put your money in a suitcase and take a plane to some foreign country and open a bank account there,” Mangels said in an interview. “Today I can use my laptop to transact cryptocurrency from my living room, using platforms located anywhere in the world, which is a big risk for governments.”
Mangels joined the Organization for Economic Cooperation and Development (OECD) in Paris, where he became one of the main architects of CARF.
Like cryptocurrency anti-money laundering (AML) procedures and standards, CARF requires cryptocurrency service providers, such as exchanges and wallet providers, to collect private and sensitive information about their customers. In this case, customers’ transactions are reported to local tax authorities, who then share the information with the customers’ home countries, just as they do with traditional bank account data.
While sophisticated blockchain analytics companies like Chainalysis, Elliptic, TRM and Crystal can track and trace on-chain wallet transactions, the trail is obscured when the transactions take place within a crypto exchange or other private trading platform, which is where the vast majority occur, Mangels noted.
The new rules provide the authorities with the light they need. Tax inspectors and law enforcement authorities will have access to a three-way combination of information including fiat input and output data, on-chain analysis of wallets on public blockchains, and previously invisible CARF ledger data from internal exchanges.
Wallet tracking, tax IDs, subpoenas
“It’s going to generate a lot of research and a lot of interest from governments that wanted this data and consider it to be very complementary to chain analysis,” Mangels said. “Let’s say the government gets some data from CARF and realizes that someone didn’t file some taxes, then they will cite the cryptoasset service provider they have identified as having the relevant information.”
More than 70 countries have already committed to CARF, and more than 50 have seen the legislation go into effect by early 2026, Mangels said. This means that many crypto companies will start collecting self-certification information from their customers, such as their tax ID and tax residency.
Transactions will be tracked throughout 2026, with the first round of reporting taking place in 2027, when each tax authority has collected the necessary information from its exchange partners.
As for Klasing’s client, given that he was willing to turn himself in, the terms he faces, including six years of amended returns, penalties and interest, may seem a bit outrageous, Klasing said. But they are being given permission for something that is almost like money laundering, he added.
“This is the only crime in America where it can be a completed crime and if you handle it correctly, you are absolved of your sins and you won’t go to jail,” Klasing said. “Why? Because you are voluntarily solving the problem.”
