Original | Odaily Planet Daily (@OdailyChina)

Author | Dingdang (@XiaMiPP)

Recently, the IRS has introduced a new survey form in its cryptocurrency tax audits.

The full name of this form is “List of Digital Asset Platforms, Wallets, Services, and Products Used (Individual Taxpayers),” requiring taxpayers to disclose one by one the cryptocurrency platforms and tools they have used, and they need to complete and sign it within approximately four weeks after receiving the notification.

This form is divided into three parts: first, exchanges, which now lists over 100 various cryptocurrency exchanges and trading platforms, such as Coinbase, Binance, Kraken, Gemini, OKX, even the bankrupt FTX is included. Taxpayers receiving the form must indicate “yes” or “no” for each platform and provide usage details such as account ID, transaction history, etc.; second, it requires disclosure of all self-custody wallets and custodial wallets, including MetaMask, Ledger, Trezor, Trust Wallet, etc. If taxpayers have interacted with DeFi protocols using wallets like MetaMask, such as Uniswap, Aave, Compound for lending, liquidity provision, or cross-chain bridging, they must also disclose this; third, taxpayers must sign a statement confirming that the information provided is complete and accurate, and they accept the consequences under perjury liability. This means that if tax authorities find omissions or errors in the future, this document itself could become legal evidence.

Many people's first reaction upon seeing this questionnaire might be: Has the U.S. suddenly begun to investigate cryptocurrency taxes?

But actually, it is not. If you pull the timeline back, you will find that this is not a sudden regulatory storm, but the result of steps taken by the U.S. tax system over the past few years. Today's survey form is actually the tax authority asking taxpayers to fill in the remaining pieces of the puzzle after having already obtained some information.

Starting from the Coinbase subpoena

In 2017, the IRS applied to a federal court for a subpoena known as the “John Doe subpoena,” requiring one of the largest cryptocurrency exchanges in the U.S., Coinbase, to provide user transaction data. The so-called John Doe subpoena is a special tool used in U.S. tax investigations. When the IRS suspects a certain group of taxpayers of having unreported income, it can request relevant data from a third-party institution without knowing the specific identities. In the initial request, the tax authority hoped to obtain transaction records for approximately 500,000 users from Coinbase from 2013 to 2015, including account information, transaction history, and fund flow details. Coinbase subsequently challenged this request legally, arguing that the scope was too broad. After negotiations, the final submission to the IRS consisted of account information for approximately 13,000 users whose common feature was that they traded amounts exceeding $20,000 during the investigation period.

Although the scale is significantly smaller than the original 500,000 users, within the industry, this incident is still seen as an important regulatory turning point. Because it sends a very clear signal: U.S. tax authorities have begun to view cryptocurrency exchanges as important sources of tax information.

In traditional financial markets, brokers already play a similar role. But in the then-current cryptocurrency world, many still viewed exchanges as merely technical platforms, rather than financial infrastructure.

In 2019, American taxpayers saw a new question for the first time while filling out the 1040 tax return: During this year, did you receive, sell, exchange, or otherwise dispose of any digital assets…

2021: Cryptocurrency exchanges written into tax law

The real change in the tax rules came with the Infrastructure Investment and Jobs Act in 2021, in which Congress for the first time included digital asset trading platforms in the tax law definition of “brokers” and required relevant platforms to report user transaction information to the IRS in the future.

What does this mean?

In traditional financial markets, stock brokers are required to report investor transaction information to the IRS using a tax form called 1099-B. Through this data, the tax system can automatically verify whether investors have reported the corresponding capital gains. However, this mechanism was long missing in the cryptocurrency market.

Many transactions occur across different platforms globally, and assets can move from exchanges to wallets and then into on-chain protocols in minutes. Tax authorities often have to rely on taxpayers’ self-reporting. After several years of rule-making and industry negotiations, this system eventually evolved into a new tax form—Form 1099-DA.

According to the rules, starting in 2025, qualifying digital asset brokers will need to record user digital asset disposal activities and will send transaction data to users and the IRS simultaneously during the 2026 tax season. The report content includes: sale amount, transaction time, and type of digital asset.

For the first time, U.S. regulators began to systematically collect data from cryptocurrency exchanges. But a large number of transactions in the cryptocurrency world do not actually occur on exchanges.

How the IRS gradually pieces together the tax map of the cryptocurrency world

From the perspective of an average cryptocurrency investor, this system might look like this:

Suppose in the past few years, you bought Bitcoin on Coinbase, traded altcoins on several overseas exchanges, and transferred some assets to MetaMask to participate in DeFi. When filing taxes one year, you checked “yes” on the digital asset question in the 1040 form, but reported very little capital gain. Maybe two years later, you would receive an audit notice letter from the IRS. The letter would require you to provide transaction records within 30 days and include a questionnaire listing the exchanges, wallets, and on-chain protocols you have used.

It seems like a sudden audit, but in many cases, auditors may already have a part of the data. If you break down the sources of this information, the data used by the IRS to reconstruct the flow of cryptocurrency assets can be roughly divided into four layers.

The first layer is exchange report data.

As the 1099-DA reporting system gradually takes effect, more centralized trading platforms are starting to report user transaction information to the IRS like traditional brokers. As long as users sell cryptocurrency assets on the platform, this transaction will be recorded as a potential taxable event and enter the tax system.

The reason exchanges have become key nodes in the regulatory system is simple; they hold the most important thing: user identity information. Under the KYC system, trading platforms know not only your wallet address but also your real name, address, and bank account.

The second layer is the financial records left by the traditional financial system.

When cryptocurrency assets interact with fiat money, such as bank transfers into exchanges or withdrawals from exchanges back to bank accounts, these fund flows often leave clear traces in the banking system. Although these records cannot directly show on-chain transaction details, they can help regulators determine the timing and scale of funds entering and leaving the cryptocurrency market. Over the past few years, the IRS has repeatedly issued John Doe subpoenas to exchanges and financial institutions to request user data, and these records often become clues for further investigation, helping the IRS determine the source and destination of funds.

The third layer is on-chain analysis. The IRS has long collaborated with blockchain analytics firms, such as Chainalysis and TRM Labs. By analyzing addresses and transaction paths, these tools can gradually establish the relationship networks of funds flowing on-chain. If a wallet has previously interacted with an exchange account, this transaction may become a key node for identity binding. Once an address is linked to an exchange account, on-chain analysis tools can gradually identify more addresses controlled by the same user through address association, transaction patterns, and funding paths.

The fourth layer is the audit questionnaire we are discussing now. In actual audits, IRS personnel often ask more specific questions based on existing data, such as whether other exchanges have been used? Whether self-custody wallets are held? Whether participation in DeFi or overseas trading platforms has occurred? Its purpose is not to collect information from scratch, but to fill in the gaps. When exchange reports, bank records, and on-chain analysis have already pieced together part of the funding flow path, questionnaires can force taxpayers to complete the remaining puzzle and confirm the accuracy of the information under perjury clauses.

As these four layers of data are gradually integrated, a tax map depicting the flow of cryptocurrency assets begins to emerge.

In this system, the most important data entry point is often the centralized exchanges. Regardless of the 1099-DA transaction reporting system or the data obtained by the IRS through John Doe subpoenas in recent years, it essentially revolves around the same node—the trading platforms that hold user identity information.

However, the problem is that trading in the cryptocurrency world doesn’t only occur on exchanges. In many cases, exchanges are just the entry point for assets to enter the cryptocurrency market. A fund might first be purchased on an exchange, then transferred to a self-custody wallet in a matter of minutes, further entering on-chain protocols for lending, trading, or derivatives operations. Subsequent trading activities often no longer depend on traditional account systems but are completed through automated market makers, on-chain derivatives protocols, or other decentralized applications.

Because of this, as centralized exchanges gradually become important sources of tax information, a new question will naturally arise: If the regulatory system increasingly relies on these platforms to provide trading data, will users' trading paths change accordingly?

In real markets, trading paths are never fixed. Liquidity depth, transaction fees, regulatory environments, and even privacy needs all influence users’ choices regarding which platforms to trade on. When the cost or transparency of a certain link changes, market participants often spontaneously seek new paths to rebalance these factors.

In this context, perhaps some fully on-chain trading protocols will be re-examined. For instance, on-chain derivatives platforms like Hyperliquid do not play the traditional role of "broker" but are a set of trading rules deployed on the blockchain, rather than a company that can directly report user transaction data to tax authorities.

In these protocols, transaction records remain public, and anyone can see the occurrence of each transaction on-chain. However, unlike centralized trading platforms, on-chain addresses do not automatically bind to a specific identity subject. At least on a technical level, they do not line up naturally with a node that can submit reports to regulatory authorities.

Because of this, as the regulatory system increasingly relies on centralized platforms for data, the regulatory visibility between different infrastructures may present some differences: transaction activities remain transparent, but identity information may not be equally transparent.

Whether this difference will change the trading structure of the cryptocurrency market in the future is perhaps still difficult to conclude now. But it can be confirmed that as tax rules begin to gradually penetrate the cryptocurrency economy, market participants will inevitably reassess the costs, risks, and transparency among different trading paths.

So, do Americans need to pay taxes for cryptocurrency profits from the past few years?

As the IRS obtains more data, some American investors may begin to worry: If the tax authorities are able to see historical transactions, do I need to pay taxes on cryptocurrency profits from the past few years?

From a legal perspective, there is no need to worry excessively. Because the U.S. tax system generally follows what is known as the statute of limitations. Under normal circumstances, the IRS can audit tax returns from the past three years; if large amounts of unreported income are identified, the statute of limitations may extend to six years; and only in extreme cases identified as tax fraud might the statute of limitations be lifted.

Moreover, in actual audits, the IRS is not randomly searching for targets but prioritizes accounts that show obvious statistical anomalies. Based on tax advisors’ experience, digital asset audits often focus on three groups of people.

The first group consists of taxpayers who checked “yes” on the digital assets question in the 1040 form but reported very few trading activities. This situation tends to create a clear contradiction in data, as checking “yes” implies acknowledgment of participation in digital asset trading, but the tax return shows almost no related income records.

The second group is accounts where the 1099-DA report does not match the tax return. If the exchange reports a user selling a large number of assets, but the capital gains reported on the tax return are significantly low, this discrepancy often draws system flags.

The third group comprises high-frequency traders during the bull market period from 2017 to 2021. During that phase, the cryptocurrency market experienced several price surges, and many investors engaged in numerous trades but did not necessarily report all their earnings completely.

Therefore, tax professionals remind taxpayers to be particularly cautious when filling out audit questionnaires. Failing to report historical platforms may trigger further scrutiny, while excessively disclosing new on-chain activities could open new lines of investigation for auditors. Therefore, consulting a tax lawyer familiar with digital assets before signing documents is generally considered a safer approach.

When tax rules meet the cryptocurrency world

From a tax law perspective, tax obligations for cryptocurrency assets are not new. The IRS defined digital assets as property as early as 2014, and related earnings have always needed to be reported.

However, as the tax system gradually improves, it may be quietly changing the structure of the cryptocurrency market. For large institutions, these changes manifest more in compliance costs. Funds, market makers, or listed companies typically have complete accounting and auditing processes, so the new reporting system resembles an additional data reconciliation mechanism.

But for many individual investors, the situation is entirely different. Especially for those users who frequently operate across multiple trading platforms, wallets, and on-chain protocols, they have been used to managing assets through a decentralized account structure in the past, while now, these seemingly decentralized trading paths are gradually being pieced together.

Today, not only the IRS in the U.S. but also the HMRC in the UK, ATO in Australia, and CRA in Canada are gradually strengthening reporting requirements for cryptocurrency asset transactions, giving rise to a whole ecosystem of specialized cryptocurrency tax software.

Image source: XT Research Institute

The entry of tax rules into the cryptocurrency economy itself is a slow and ongoing change that the regulatory system is undergoing.

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