IRS Cryptocurrency Audit Triggers: What Investors Must Watch in 2025

By: Swathi Gandham

As cryptocurrency continues its rapid growth, the IRS is stepping up enforcement efforts to ensure proper reporting and compliance. Therefore, both investors and tax professionals should be aware of key audit triggers in 2025 that could lead to increased IRS scrutiny.

Common Triggers

Individuals investing in Crypto should be aware of the following common errors that may trigger IRS scrutiny:

• Failure to Report Crypto Assets on Form 1040: Taxpayers must answer the digital asset question each year. Leaving it blank or ignoring it, even if no transactions occurred, can raise red flags.
• Unreported Crypto-to-Crypto Trades: Many mistakenly believe trading one cryptocurrency for another isn’t taxable. However, these trades are taxable events and must be reported as capital gains or losses.
• Large or Frequent Transfers Between Wallets and Exchanges: Unexplained or inconsistent asset movements can attract IRS attention.
• Use of Privacy Coins or Mixing Services: Transactions involving privacy-focused coins (like Monero or Zcash) or mixers can draw increased scrutiny from the IRS, due to their anonymity features.
• Failure to Report Crypto Received as Income: Income from mining, staking, airdrops, or crypto payments must be reported as ordinary income.
• Neglecting NFT and DeFi Income Reporting: Income from NFT sales and DeFi activities such as yield farming, lending, and staking is taxable and closely monitored.
• Inconsistent Cost Basis or Missing Records: Poor or missing documentation of crypto transactions can lead to audits.

Avoiding Common Pitfalls

To avoid these pitfalls, taxpayers should follow these compliance tips:

• Reconcile Form 1099-DA: Starting in 2025, many exchanges will issue this form. Match reported amounts carefully with your tax returns.
• Maintain Detailed Records: Document every transaction’s date, type, cost basis, proceeds, and wallet details.
• Review Prior Years: If crypto activity was previously unreported, consider filing amended returns or using the IRS voluntary disclosure program to reduce penalties.

Conclusion

By staying organized and informed, you can confidently navigate crypto tax reporting and minimize audit risks. For assistance in managing your crypto portfolio, contact the trusted Chugh, LLP accounting team.