Can the IRS Track Bitcoin? Koinly Explains

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The IRS might not be the best at keeping ahead of the crypto curve, but if you think you can hide your Bitcoin gains – think again. Crypto tax calculator Koinly is here to explain just how the IRS can track your crypto.

Got gains or income from crypto? The IRS would like their cut, thanks.

For a long time, the IRS largely ignored the crypto market, leading many crypto investors to mistakenly believe they could underreport or outright avoid crypto taxes. But they’re paying attention now and they’ve made it perfectly clear your crypto is subject to Capital Gains Tax or Income Tax.

You need to report your crypto taxes as part of your annual tax return – and the tax deadline is looming. You’ve got until the 18th of April 2022 to file.

Thinking you’ll risk it? After all, how could the IRS possibly know about all your crypto, right?

Think again. Crypto tax calculator Koinly is here to explain how the IRS tracks your crypto.

Can the IRS track crypto?

Let’s get the obvious question out the way. Yes, the IRS can track crypto – whether that’s BTC, ETH, DOGE or more.

How is the IRS tracking crypto?

Quite a few ways actually, but they mostly revolve around the increasing amount of personal data available surrounding crypto transactions.

To operate in the US, all centralized crypto exchanges now need to have some kind of KYC verification in place. KYC processes vary but in general as a minimum, they’ll include information like:

• Your name
• Your address
• ID

Some exchanges even ask for your social security number on top of this. This data alone is plenty for the IRS to identify you with, but KYC checks are actually evolving. You may have noticed an increasing number of centralized exchanges are now adopting advanced KYC processes where they collect data like:

• Biometric identification
• A short video of yourself
• Photos of yourself alongside your ID

Other exchanges (and indeed even decentralized wallets in some instances) will also collect other information about you including your bank account details and phone number.

Where does all this information go? Well, potentially to the IRS.

The IRS can request – and legally compel – crypto exchanges to share customer data in order to ensure tax compliance.

Wait, crypto exchanges report to the IRS?

Yes, many crypto exchanges have already confirmed this.

Coinbase, Kraken and Poloniex have all faced John Doe summons from the IRS already. This summons compels a business to share user data with the IRS in order to identify and audit taxpayers.

As well as this, many other crypto exchanges issue 1099 forms now in order to comply with IRS guidance. Exchanges that issue 1099 forms to users include Binance US, Robinhood, Crypto.com, Celsius, eToro, Gemini and Kraken to name only a few.

Did you get a 1099 form? Then so did the IRS. Two identical copies go out – one to you and one to the IRS.

Ok, so what if I stick to decentralized?

So centralized exchanges and wallets definitely report to the IRS – but surely decentralized exchanges and wallets are safe? They don’t collect KYC data after all.

Not quite so straightforward unfortunately.

For starters, if you’re moving crypto between centralized exchanges and decentralized wallets – that exchange has your wallet address and that information is up for grabs for the IRS.

Your wallet might not be as decentralized as you expect either. Binance owns Trust Wallet, and they’re already embroiled in a legal battle with the IRS over operations in the US.

As well as this, some wallets ask for data like your phone number or bank account. Though these wallets haven’t had the IRS chasing after them yet – if and when they do, that’s enough information to identify you with.

Operation Hidden Treasure launched in March 2021. It’s an operation led by the IRS and the civil office of fraud enforcement, starring a specialized team trained in tracking digital assets with one goal – to root out tax evasion and fraud.

What do you need to report to the IRS?

So there’s nowhere to hide. The IRS can and will track your crypto. The best thing you can do to avoid an unwelcome audit is report your crypto accurately to the IRS.

What do you need to report? Quite a lot, including:

• 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.

It’s a lot of information to get hold of if you’re an active investor, but Koinly can make this simple. Here’s how:

1. 1. Connect all your wallets, exchanges and blockchains to Koinly. You can do this via API or by importing CSV files of your transaction history. Make sure to do it for every single wallet or exchange you use (Koinly supports more than 600!).
   2. Grab a coffee and let Koinly do its stuff. Koinly will collate your entire crypto transaction history and identify which transactions are taxable and which aren’t. Then it’ll calculate your cost basis, capital gains or losses and the fair market value of any crypto income on the day you received it.

• Download your crypto tax report. Download the tax report you need, when you need it. Koinly can generate a huge variety of reports including Form 8949 and Schedule D, TurboTax online reports and our Complete Tax Report, with everything you need to know about your crypto taxes.

• Use your crypto tax report to file your preferred way. Hand your reports over to your accountant, upload your crypto tax report to your tax app or live in the 1990s and file by post.

Now relax – you’re done. If you’d like to learn more about crypto tax – check out the ultimate US crypto tax guide.

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