With the IRS ramping up its audits in 2025, cryptocurrency holders are among the prime targets. Imagine coming home to an unexpected IRS letter demanding years of back documentation on every crypto trade you’ve ever made—this can quickly become a financial nightmare if you’re not prepared. As the rules for crypto taxes become increasingly complex, many individuals fail to stay compliant, which can lead to hefty penalties or audits.
The good news is that with proper planning and attention to detail, you can avoid these costly mistakes. Lets walk through the five most common errors crypto investors make that can potentially trigger IRS examination / audits, and how you can steer clear of them. Whether you’re a seasoned investor or new to the crypto space, these tips will help you stay on the IRS’s good side and prevent unnecessary stress.
1. Ignoring Wallet-Based Accounting
One of the most significant changes in crypto tax reporting for 2025 is the IRS’s new requirement to report each wallet’s transactions and balances individually. That means a lot of work. Gone are the days of lump-sum reporting for all your crypto holdings. The IRS now expects taxpayers to keep detailed records for each wallet, including hot and cold wallets. Yes, you heard it right.
You think that messy spreadsheet is enough? Many crypto holders make the mistake of tracking their transactions in a chaotic spreadsheet, or worse, not tracking them at all. This is a surefire way to get on the IRS’s radar. To avoid triggering an audit, it’s critical to use proper crypto tax software that can help you accurately track and report your wallet balances and transaction history.
There is some help in the market. Popular tools like CoinTracking, CoinLedger, and TaxBit are designed to make this process easier. These platforms can sync your wallet data from various exchanges, ensuring that all purchases, sales, and transfers are accounted for in real time. By using wallet-based accounting, you can ensure that your tax filings are accurate and compliant with the IRS’s updated rules, saving you from an audit and potential penalties.
2. Misreporting Staking Rewards
Another common mistake that crypto investors make is failing to report or misreporting staking rewards. Staking is when you participate in a blockchain network by holding and validating transactions for rewards. These rewards, however, are taxable income from the moment they hit your wallet. Yes, is hard but true.
Many people wrongly assume that they only need to report staking rewards when they sell them. This is a mistake. Even if you haven’t sold your staking rewards, the IRS considers them taxable as soon as they are earned and transferred to your wallet. Just as an example, if you earn 2 ETH in staking rewards and it’s worth $3,000, yes, you must report that amount as income on your tax return, even if you don’t convert it into fiat currency.
To stay compliant, it’s essential to track all staking rewards properly. Platforms like ChainBlock Financial offer guides and tools that can help you accurately calculate your staking income and ensure that you report it correctly. Auditors might not carry pitchforks and torches at night… but they are not here for a friendly chat either! If you don’t report your staking rewards correctly, it could trigger a red flag for the IRS, leading to an audit. You think auditors are nice and friendly? Think again!
3. Not Understanding IRS Letters and 1099-DA
One of the biggest fears for crypto investors is receiving an IRS letter or misunderstanding Form 1099-DA. These can be daunting but are critical to address correctly.
Key IRS Letters, you don´t want to see
- Notice 6371: “We have questions” Letter- This letter signals that the IRS has noticed something off about your crypto transactions. It might be a missing report or an unexplained transaction, and the IRS wants clarification.
- Notice 6374: This “explain yourself” letter is more serious, often issued when discrepancies in your reported income or transactions are found. Essentially, the IRS is asking you to prove your claims.
- CP2000: This “we thing you owe us” notice is sent when the income you reported doesn’t match third-party data, such as exchange-reported transactions. It’s often accompanied by a proposed change to your tax liability.
Form 1099-DA
Starting in 2025, crypto exchanges will issue Form 1099-DA to report your digital asset transactions to both you and the IRS. This form includes income from staking, mining, and rewards, as well as sales and trades of crypto. Any discrepancies between your tax return and the 1099-DA can trigger audits. If you think you can hide trades on a DEX… you definitely thought wrong!
To avoid issues:
- Carefully review Form 1099-DA for accuracy. If there are errors, contact the exchange immediately.
- Match your reported income and transactions to the data on the form to ensure consistency.
Using tools like CoinTracking or TaxBit can help you cross-check records and ensure compliance. But don´t panic and let us do the work for you: experts like ChainBlock Financial or AKIF CPA will easily help you respond to any IRS inquiries effectively.
4. Failing to Report All Crypto Transactions
One of the most common mistakes that triggers IRS audits is failing to report all crypto transactions. Yes, all of them. Whether you’ve made small trades or large purchases, every transaction needs to be included in your tax filing. This includes not just sales and trades but also the receipt of crypto from airdrops, rewards, forks or other activities.
Even if you trade on decentralized exchanges (DEXs) or use privacy coins, the IRS can trace your activity through blockchain analysis. Spoiler alert: they´ve got the tools to find you! Failing to report transactions, especially those involving decentralized platforms or anonymous coins, can raise red flags for the IRS.
To stay compliant, it’s essential to maintain thorough records of all your crypto transactions, regardless of the platform used. Keeping a detailed log of each trade, the value of the assets, and the date of the transaction will make it easier to report accurately on your tax returns. Using crypto tax software can simplify this process and ensure that no transactions are overlooked. Because when the IRS comes knocking, “I forgot” won´t save you.
5. Missing the Opportunity to Adjust Cost Basis in 2025 and Claiming Excessive Deductions
The 2025 calendar year presents a crucial chance to adjust your cost basis for crypto assets. With the IRS’s increased scrutiny, accurately calculating your cost basis is more important than ever. This adjustment ensures that you correctly calculate your gains and losses, avoiding penalties and minimizing your tax liability.
Failing to seize this opportunity could result in inflated tax bills or audits. AKIF CPA and ChainBlock Financial, experts in this topic will help you navigate these adjustments and take full advantage of the available rules.
The IRS has now given the entire calendar year of 2025 to fix cost basis issues and any adjustments you might have. This rule is very important since most of the crypto is traded in decentralized exchanges without KYC and its important to know what the cost basis of such cryptocurrency is when its moved into a centralized exchange with KYC rules such as Coinbase.
So make sure to calculate all your unused basis and properly allocate this basis otherwise this is a chance of a lifetime to fix such cost basis issues.
About claiming excessive deductions, many crypto investors try to minimize their tax liabilities by doing exactly that, from large business expenses to hobby deductions related to their crypto activities. While it’s true that crypto-related expenses can sometimes be deducted, the IRS is wary of deductions that seem unusually large compared to your overall income. If it seems too good to be true, the IRS will agree.
How to Minimize the Risk of an IRS Audit
While there is hope and the chances of being audited are relatively low (less than 1% of all taxpayers in 2024), crypto investors could face a slightly higher risk due to the complexities of digital assets. The best way to minimize the risk of an IRS audit is by ensuring that your tax filings are accurate, transparent, and complete.
Here are some best practices for reducing audit risk:
- Use Crypto Tax Software: Tools like Koinly, Zenledger, CoinTracking, CoinLedger, Netrunner, Cryptotaxcalculator, TaxBit and TokenTax can automate the tracking of your crypto transactions and simplify the reporting process.
- Double-Check Your Tax Return: Even small errors can trigger an audit. Yes, the devil is in the detail! Review your tax return carefully before submission to ensure all transactions and income are reported correctly.
- Consult a Crypto Tax Expert: If you’re unsure about any aspect of your crypto tax filing, seek help from a professional accountant or tax advisor with expertise in cryptocurrency. They can help you navigate complex rules and avoid common mistakes.
- Keep Detailed Records: Maintain comprehensive records of all your transactions, including the date, value, and purpose of each trade. This will make it easier to respond to any IRS inquiries and ensure you’re prepared if an audit arises.
- Be Honest and Transparent: If you’ve made mistakes in the past, it´s ok. But it’s best to correct them before the IRS finds them. Voluntary disclosure can often lead to more favorable outcomes than waiting for an audit.
Conclusion: Staying Compliant and Stress-Free
Yes, it is challenging! Navigating the world of crypto taxes is not getting easer, we know that, but by avoiding these common mistakes, you can reduce your chances of an IRS audit and make sure your financial future is secure. If you need help managing your crypto taxes, AKIF CPA and ChainBlock Financial are here to guide you. Our team of experts can assist with everything from accurate reporting to audit defense, ensuring that you remain compliant and stress-free in the ever-evolving crypto landscape.
To learn more about how we can help with your cryptocurrency taxes, or to schedule a consultation, contact us at [email protected]. Don’t wait until the IRS comes knocking—start taking control of your crypto tax reporting today!
