The US IRS turns its attention to digital assets

The Internal Revenue Service (IRS) has issued new tax forms in a bid to streamline reporting on earnings from digital assets in the US. 

Centralised exchanges and other brokers have been required to report their digital asset transactions since January 1 this year. IRS form 1099-DA, officially titled “Digital asset proceeds from broker transactions”, is the first such form created for reporting these assets, which will be filed from 2026 to include 2025 transactions. 

It is part of the broader regulatory effort to oversee income from the digital asset market, including cryptocurrencies, non-fungible tokens(NFTs), and stablecoins.

According to Nick Slettengren, founder of Count On Sheep, a US-based crypto tax preparation and crypto bookkeeping service, many of those who invest and operate in the crypto space prioritise their privacy and put it at the core of the central mission of decentralised finance and digital assets. These new IRS forms have raised compliance concerns within the community. 

There are two types of crypto holders, Slettengren says, those who seek to be tax compliant and reconcile all their crypto wallets, and those who “jump overseas”. However, the camp that ends up “relocating to Dubai” and renouncing their American citizenship to avoid US taxes is not the one that seeks out tax advice from firms like his. 

“We all thought crypto was secret, we all thought crypto was power,” he said. “Most blockchains, especially [those recording] Bitcoin, they’re global public ledgers that anyone can access, just like accessing the internet. You can literally go through and see every single transaction that’s ever been made throughout the history of blockchain.

“It’s the evolution of accounting,” he added. “No cooking the books, none of that, it’s really just a perfect system for accounting.”

Digital asset brokers

A digital asset broker is any person or organisation that actively enables digital asset transactions for customers and has access to or verifies the identity of the counterparties involved. Anyone who qualifies as a digital asset broker is required to submit Form 1099-DA to the IRS. 

They are required to report digital asset sale and exchange transactions, furnish payee statements, and backup withhold, or reserve tax on future payments, on certain transactions beginning on January 1, 2025. 

As part of the form, brokers must submit payees’ names and tax identification numbers (TIN) to the IRS’s TIN matching program and receive confirmation that the name and TIN combination matches IRS records.

A recent survey from crypto platform Kraken found 84% of US crypto holders expressed concern that tax regulations will affect their investment returns. Meanwhile, 61% reported they have already adjusted their investment strategy in response to current or anticipated tax rules.  

According to Slettengren, while many crypto investors are “really smart” and come from “typically pretty good fields”, many people like to comply with the new tax laws themselves by relying on spreadsheets and other do-it-yourself software tools that “can’t handle the complexity of modern decentralised finance (DeFi)”.

Form 1099-DA will primarily report information that helps taxpayers calculate capital gains from digital assets, as well as ordinary income. This includes the acquisition date of the digital asset, the purchase price, the date it was sold or swapped, and the earnings from that activity. 

“Specifically, the biggest issue with crypto is simply this. We have these centralised exchanges that don’t have to speak to one another because [they operate in a decentralised environment],” said Slettengren. When transferring money from exchanges such as Coinbase to Binance the exchanges don’t have to tell each other the cost basis, which is “the foundation of accounting”, he adds. 

The ability of the IRS to access or garnish (access and retrieve tax liabilities) cryptocurrency accounts depends on the type of wallet or exchange and the level of custodial control and compliance with US regulations. The IRS has the authority to subpoena records, issue levies, or enforce garnishments on the following types of accounts:

Centralised exchanges (CEXs)

These platforms require Know Your Customer (KYC) verification and compliance with US tax laws. The IRS can subpoena transaction data and garnish funds. Examples include: Coinbase, Kraken, Gemini, Binance US, Crypto.com, and Bitstamp.

Custodial accounts

If a third party holds your private keys, such as in crypto individual retirement accounts (IRAs), custodial wallets or lending platforms, the IRS can access or garnish these accounts through legal means.

Traditional financial platforms with crypto exposure

Brokerage accounts such as Robinhood, Fidelity, or PayPal that offer crypto services fall under existing IRS authority for garnishment or reporting.

However, according to Slettengren, there are several crypto accounts where the IRS would find it harder to access or garnish funds. However, while those platforms or tools provide privacy and user control, that does not mean they are immune to taxation or legal consequences. 

Those include: 

Self-custody wallets

Examples: Ledger, Trezor, MetaMask, Phantom, Trust Wallet

These wallets are controlled entirely by the user. No third party holds the assets, so there is no entity the IRS can subpoena or levy directly. However, transactions are publicly visible on the blockchain, and the IRS uses forensic tools such as Chainalysis to trace wallet activity. Once linked to an identity, enforcement is possible.

Decentralised exchanges (DEXs)

Examples: Uniswap, PancakeSwap, 1inch

These platforms operate without user accounts, KYC, or custodial services. The IRS cannot garnish funds or subpoena data directly from DEXs. However, the activity is still recorded on-chain and can be investigated.

Offshore exchanges without US presence

Examples: KuCoin, OKX, Bybit, MEXC

Many of these exchanges do not currently report to the IRS, but they may come under future regulatory pressure or treaty obligations. Using these platforms does not eliminate tax liability, and US citizens found hiding assets offshore could face civil or criminal enforcement.

“Self-custody wallets and DEXs are not exempt from taxes — you are still required to report gains, losses, and income, even if the IRS cannot directly access those funds,” Slettengren said. 

Meanwhile, blockchain activity is public: “If the IRS links a wallet to your identity (for example, through a transfer from a KYC exchange), they can use it in an audit or investigation.”