Wondering if your Bitcoin transactions are traceable by the IRS and whether the IRS can track crypto? You've come to the right place. In this guide we're looking at whether cryptocurrencies can be tracked by the IRS, how the IRS track crypto, which crypto exchanges report to the IRS, which crypto exchanges don't report to the IRS and more.
Is Bitcoin traceable by the IRS?
Yes, Bitcoin is traceable. Here's what you need to know:
- Blockchain transactions are recorded on a public, distributed ledger.
- This makes all transactions open to the public - and any interested government agency.
- Centralised crypto exchanges share customer data - including wallet addresses and personal data - with the IRS and other agencies.
- The IRS has dedicated agents trained to connect wallet addresses to users.
How is cryptocurrency traceable?
For many investors, the appeal of crypto comes down to the anonymity. After all, cryptocurrencies are often touted as decentralized, anonymous, untraceable and tamper-proof assets. But it's not quite that simple in reality.
Bitcoin and other cryptocurrencies are built using blockchain technology. One of the key tenets of blockchain technology is transparency - which is upheld by the public digital ledger. Anyone can access these ledgers and view any transaction on that blockchain. Moreover, all transactions are permanently stored on the ledger.
So, any interested party can use a transaction ID and a blockchain explorer to find corresponding wallet addresses - or vice versa to see what transactions a given wallet has made. Interested parties can include any government agencies, including the IRS, FBI and more.
Of course, there is still a sense of anonymity, after all - your wallet address doesn't include any of your personal details... or does it?
Linking your wallet address to you is becoming increasingly easy for the IRS and other agencies, in part, due to the pressure crypto exchanges have faced from government to collect and share customer data.
How do the IRS track crypto?
The IRS is gaining increasing amounts of data about crypto transactions. In fact, as of 2022, the IRS was granted a huge budget increase in order to tackle tax evasion. More than 87,000 agents are being hired to enforce tax compliance... and crypto was singled out as a key focus for these agents.
All major crypto exchanges now need to complete Know-Your-Customer (KYC) checks on new and existing customers in order to operate in the US.
KYC checks were previously quite simple and only asked for basic personal data like your name, address and sometimes your social security number (though that’s still plenty for the IRS to identify you with). But KYC checks have evolved alongside ID technology, with many crypto exchanges now adopting various KYC verification methods such as:
- Biometric identification.
- Asking users for short videos of themselves.
- Taking photos alongside their ID.
As well as this, crypto exchanges collect other information about you - including your banking information, your phone number(s) and employment details.
Crypto exchanges also have the visibility of crypto addresses you withdraw funds to. This means they can effectively identify your custodial wallets - like if you’re withdrawing funds to a MetaMask wallet for example.
Do crypto exchanges report to the IRS?
Yes. A variety of large crypto exchanges have already confirmed they report to the IRS.
Back in 2016, the IRS won a John Doe summons against Coinbase. A John Doe summons compels a given exchange to share user data with the IRS so it can be used to identify and audit taxpayers, as well as prosecute those evading taxes. Since 2016, the IRS has won similar cases against both Kraken and Poloniex.
The success of these summons, alongside the various regulations they must follow in order to operate in the US lawfully, has compelled many crypto exchanges to comply with the IRS to avoid a similar summons in the future.
As well as this, Operation Hidden Treasure was launched in March 2021. It’s a partnership between the civil office of fraud enforcement and the IRS and made up of a specialized team trained in cryptocurrency and virtual currency tracking. The aim of the game? To root out tax evasion from crypto investors.
Which crypto exchanges report to the IRS?
It’s impossible to say for certain how many crypto exchanges are reporting to the IRS or precisely which crypto exchanges are reporting to the IRS. Many exchanges rightfully don’t want to advertise this to their users as one of the core tenets of crypto is anonymity.
This said, in an effort to stay in the good books of the IRS, many crypto exchanges are sending out 1099 forms. 1099 forms are a record of income or an individual taxpayer. 1099 forms come in a variety of shapes and sizes (which you can learn about in our crypto 1099 form guide) - but what you need to know is that whenever you get a copy of a 1099 form, so does the IRS.
Crypto exchanges that are sending out 1099 forms include:
- Coinbase Pro
- Coinbase Prime
- Binance US
- Robinhood Crypto
- PayPal Crypto
It is likely that with impending changes to crypto tax legislation this year - including a dedicated digital assets 1099 form - more crypto exchanges than those listed above will send out 1099 forms in an attempt to comply with the IRS and avoid penalties.
When do crypto exchanges report to the IRS?
Regarding 1099 forms, the taxpayer and the IRS will generally receive these in January or February following the previous tax year.
However, the IRS is probing many crypto exchanges currently - including Binance. It’s impossible to say if or when these crypto exchanges will share data with the IRS and when.
Which crypto exchanges do not report to the IRS?
There are a number of crypto exchanges that do not issue 1099 forms nor collect KYC data for most small traders including:
- OKX (excluding for P2P trades)
You can see a full list of the best crypto exchanges with no KYC, but there's a catch. First up, many platforms with no KYC have limits to the transactions you can make - for example, OKX does not allow P2P trades without KYC verification and KuCoin has lifetime withdrawal limits without KYC verification.
As well as this, many of these exchanges aren't legally allowed to operate in the US and many other countries as they don't meet regulation requirements. As such, they may freeze accounts and need to withdraw services from users flagged with certain IP addresses quickly - meaning your funds could be frozen on the platform. Many Gate.io users reported this issue when the exchange withdrew services from the US some years ago and had little option but to cut their losses.
In other words, while the major exchanges all collect KYC and report to the IRS - this often protects you as a consumer. While the regulations are far from perfect, a tax bill is a small price to pay to know your assets are better protected with compliant and regulated exchanges.
Can I be linked to a wallet address?
Non-custodial wallets are increasing in popularity, especially in the wake of the FTX Group collapse. There's a huge range of wallets to pick from, and better still, the vast majority of these wallets don't collect KYC data or personal data of any kind - meaning even in the unlikely scenario they faced a John Doe summons from the IRS, they'd have very little information to share, right?
There's a few ways you can get linked to your wallet address, even if you've stored no personal information on it.
First, some wallets let you link a credit or debit card to let you buy crypto easily - for example, Trust Wallet. It's super convenient for when you want a quick purchase, but it also creates an easy way to link a personal bank account to a given wallet. Your banking provider is legally required to share information with the IRS and other government authorities - and you can bet if you're making crypto purchases, the IRS is going to take an interest in what other crypto transactions you've made.
As well as this, if you're transferring crypto between your non-custodial wallet and centralized exchanges that do share data with the IRS... that data might include your wallet address.
As you can see, it's become increasingly difficult for crypto investors to truly remain anonymous, regardless of the exchange, wallet or blockchain they're using. The best thing you can do is report your crypto accurately and pay your tax liability - or face far steeper penalties than a tax bill.
Not sure what you need to report? Here's what they want to know...
What do I need to report about crypto to the IRS?
The IRS want a lot of information about your crypto assets, including:
- The date of each transaction.
- Your cost basis or the fair market value of your crypto in USD the day you acquired it.
- The fair market value of your crypto in USD the day you disposed of it.
- The capital gain or loss you made from each transaction.
- What the transaction was and the parties involved.
- Receipts of purchase and sale.
- Records of transfers and transactions from all your crypto wallets and exchanges.
You’ll need to report all this on Form 8949 and Schedule D, as well as any crypto income on Schedule 1 as part of your annual tax return, by April 15 each year. You can learn more about reporting your crypto taxes in our complete US crypto tax guide.
How does the IRS verify cost basis?
Tempted to tweak your cost basis in order to pay less tax?
It’s tax evasion and it’s not worth the risk. While the IRS might not be able to prove anything from one single tax return - they can compare cost basis and the cost basis methods for crypto from your previous tax returns. If there are discrepancies, the IRS can and will audit you.
The usual statute limit for an IRS audit is three years. But when it comes to overstating cost basis by 25% or more, the IRS has 6 years to audit those tax returns.
I forgot to report cryptocurrency on taxes - what do I do?
Whether you forgot or you “forgot” - if the IRS believes you've committed tax fraud, there's no limit to how far back they can audit you. Fortunately, you have a couple of routes available for you to avoid a crypto tax evasion penalty.
The best thing to do in this scenario is to amend your tax return for the years you forgot to report crypto. You have three years from the date you originally filed to file an amended return. The IRS is far more likely to be lenient to those who make the effort to go back and correct their taxes.
To amend your tax return - you'll need to file an IRS Form 1040X. Don't worry, you won't need to file all your taxes again, only the missing information.
Alternatively, if you've deliberately underreported or avoided reporting crypto on your taxes altogether, the IRS just updated Form 14457 to include a section on reporting virtual currency. Form 14457 is a voluntary disclosure application that allows taxpayers who may be facing criminal prosecution for violation of tax laws voluntarily disclose information to the IRS they previously failed to disclose. By filing a Form 14457, you agree to comply with the IRS and pay any due taxes.
How Koinly crypto tax calculator can help
We get it. Crypto taxes are time consuming, that’s why we made Koinly crypto tax calculator. We make it easy to get your crypto taxes done in no time at all and ensure you remain tax compliant.
All you need to do with Koinly is sync all the crypto exchanges, wallets and blockchains you use (we support a lot!) using API or by importing a CSV file of your transaction history. Once you’ve done that, Koinly will calculate your capital gains, losses, income, expenses and more and fetch your crypto tax report, ready for you to download.
For US investors, Koinly can generate a pre-filled Form 8949 and Schedule D, the Complete Tax Report (for crypto income) and a variety of tax reports for tax apps like TurboTax and TaxAct.
Got more burning questions? Here's the answers to our most frequently asked questions about tracking Bitcoin and crypto transactions:
Can the IRS track cryptocurrency?
Yes, the IRS can track cryptocurrency, including Bitcoin, Ether and a huge variety of other cryptocurrencies. The IRS does this by collecting KYC data from centralized exchanges.
Can the government track Bitcoin?
Yes, the government (and anyone else) can track Bitcoin and Bitcoin transactions. All transactions are stored permanently on a public ledger, available to anyone. All the government needs to do is link you to your wallet or transaction.
Will the IRS catch a missing 1099?
Yes. Any time you receive a 1099 form - the IRS receives an identical copy. So if you avoid reporting your transactions relating to a given 1099 form, the IRS will absolutely know about it.