Blockpit employs strict editorial principles to provide accurate, clear and actionable information. Learn more about our Editorial Policy.
As cryptocurrency continues to gain mainstream adoption many investors wonder about privacy and tax implications. One question keeps coming up can the IRS track Bitcoin transactions? The short answer is yes, and they’re getting better at it every day.
At our crypto tax firm, we’ve seen a dramatic increase in clients coming to us after receiving IRS notices Let’s dive into exactly how the IRS tracks cryptocurrency and what you need to know to stay compliant
The Myth of Bitcoin Anonymity
Many folks think Bitcoin and other cryptocurrencies are completely anonymous. This is a dangerous misconception that could land you in hot water with tax authorities.
Bitcoin is actually pseudonymous, not anonymous. All transactions are permanently recorded on a public blockchain that anyone can view—including government agencies like the IRS.
Real-World Examples of Bitcoin Tracking
The government has successfully traced Bitcoin in numerous high-profile cases:
- Silk Road Seizure: In 2013, the FBI tracked and seized over 170,000 BTC linked to the illegal online marketplace by analyzing blockchain data.
- Colonial Pipeline Ransomware: In 2021, the DOJ recovered $2.3 million in Bitcoin paid to hackers by tracing transactions through wallet addresses.
- IRS Investigations: The IRS has worked with analytics firms to uncover tax evasion schemes through blockchain analysis.
How Does the IRS Track Cryptocurrency?
The IRS uses multiple sophisticated methods to track crypto:
1. Exchange Reporting
Major exchanges operating in the US are required to report customer information to the IRS. They collect your personal data through Know Your Customer (KYC) procedures, including:
- Full name
- Date of birth
- Photo ID
- Social Security Number
These exchanges then issue various forms to both you and the IRS:
| Exchange | Reports to IRS |
|---|---|
| Coinbase | Yes (1099 forms) |
| Kraken | Yes (1099 forms) |
| Gemini | Yes (1099 forms) |
| Binance.US | Yes (1099 forms) |
| Robinhood | Yes (1099 forms) |
| PayPal | Yes (1099 forms) |
| Crypto.com | Yes (1099 forms) |
2. Blockchain Analysis Tools
The IRS doesn’t rely solely on exchange reporting. They’ve invested heavily in blockchain analytics technology and partnerships with companies like Chainalysis to:
- Track transactions across the blockchain
- Connect “anonymous” wallets to known individuals
- Identify patterns of suspicious activity
- Flag potential tax evasion
In 2021, the IRS launched Operation Hidden Treasure, specifically targeting cryptocurrency tax evasion. And with their $80 billion budget increase in 2022 to hire 87,000 new agents, their tracking capabilities are only improving.
3. John Doe Summons
The IRS has issued “John Doe Summons” to major exchanges like Coinbase and Kraken, requiring them to turn over records for all customers who conducted transactions above certain thresholds.
These summons allow the IRS to cast a wide net and identify thousands of crypto users who might not be properly reporting their taxes.
What About Non-KYC Exchanges and Private Wallets?
Some investors think they can avoid detection by using non-KYC exchanges or private wallets. While these methods provide less direct tracking, they’re not as safe as you might think.
Non-KYC Exchanges
Platforms that don’t require KYC information include:
- Bisq
- Uniswap
- RoboSats
But here’s the catch: starting in 2026, virtually all centralized AND decentralized exchanges operating in the US will be required to implement KYC procedures and report customer transactions to the IRS.
Private Wallets
Moving crypto to a private wallet doesn’t necessarily shield you from the IRS. If you’ve ever:
- Transferred funds between your wallet and a KYC exchange
- Purchased crypto with a linked bank account or credit card
- Converted crypto to fiat through regulated channels
…there’s likely a trail the IRS can follow to connect your wallet to your identity.
The 1040 Crypto Question: A Tax Trap?
Since 2020, the IRS has included a specific question on Form 1040 asking if you’ve transacted in cryptocurrency during the tax year.
This isn’t just idle curiosity—it’s a strategic move. Answering “no” when you’ve had crypto transactions creates a paper trail of potential tax fraud. Answering “yes” flags your return for closer scrutiny if you don’t report crypto income.
What Happens If You Don’t Report Crypto to the IRS?
I’ve seen clients face serious consequences for failing to report crypto transactions. The penalties can be severe:
- Accuracy-related penalties: 20% of the underreported tax
- Negligence penalties: Additional fines
- Criminal charges: For intentional tax evasion (up to 5 years in prison and $100,000 in fines)
The IRS can audit returns going back 3 years, or up to 6 years if they suspect significant underreporting. In cases of fraud, there’s no time limit!
Can the IRS Track NFTs Too?
Absolutely. NFTs exist on the same public blockchains as cryptocurrencies like Ethereum. The IRS can trace NFT transactions using the same methods they use to track other crypto assets.
What Should You Do to Stay Compliant?
Rather than trying to hide from the IRS (which is both illegal and increasingly difficult), follow these steps:
1. Keep Detailed Records
Track all your crypto transactions, including:
- Purchase dates and prices
- Sale dates and prices
- Fees paid
- Wallet transfers
- Income events (staking, mining, airdrops)
2. Report All Taxable Events
Crypto taxable events include:
- Selling crypto for fiat currency
- Trading one crypto for another
- Using crypto to purchase goods or services
- Receiving crypto as payment for goods/services
- Mining or staking rewards
- Airdrops and hard forks
3. Use the Right Tax Forms
- Form 8949: Lists all crypto disposals
- Schedule D: Summarizes your capital gains and losses
- Schedule 1: Reports ordinary income from crypto (mining, staking, etc.)
4. Consider Professional Help
With the complexity of crypto taxes, using professional tax software or consulting with a crypto tax expert can save you headaches and potentially money.
What If I Haven’t Reported Crypto in Previous Years?
If you’ve failed to report crypto in the past, don’t panic, but do take action. The IRS is more lenient with taxpayers who voluntarily correct their mistakes.
File an amended tax return for previous years. The process involves:
- Completing Form 1040X
- Attaching corrected versions of your tax forms
- Paying any taxes owed plus interest
This proactive approach shows good faith and may help you avoid more severe penalties.
The days of crypto flying under the tax radar are long gone. The IRS has invested significant resources into tracking cryptocurrency transactions, and their capabilities are only growing stronger.
We’ve seen many clients come to us after trying to hide their crypto activities, and it rarely ends well. Rather than playing cat and mouse with the IRS, embrace transparency and proper reporting.
Remember, paying taxes on your crypto gains is far better than facing the potential consequences of tax evasion. If you’re unsure about your crypto tax situation, don’t hesitate to reach out to a qualified tax professional who specializes in digital assets.
Have you received a notice from the IRS about your crypto? Share your experience in the comments below, and let’s help each other navigate this evolving landscape!
What Actions Should I Take If I Forgot to Report Cryptocurrency on My Tax Returns?
If you forgot to report crypto, amend your tax returns using IRS Form 1040X within three years of the original filing date. Correcting your taxes voluntarily shows compliance and may result in leniency. For deliberate underreporting, use Form 14457 for virtual currency disclosures, agreeing to settle taxes and adhere to IRS regulations to avoid severe consequences.
Does the IRS Have the Ability to Track NFTs?
Yes, NFT transactions on public blockchains are visible and traceable. The IRS uses methods to link digital footprints to real identities, uncovering NFT ownership even when believed to be anonymous.
How Does the IRS Know About Your Crypto?
FAQ
Does the IRS know about my Bitcoin?
Cryptocurrencies are traceable, with transactions recorded on a public ledger accessible to the IRS. The IRS uses advanced methods to track crypto transactions and enforce tax compliance. Centralized exchanges provide user data to the IRS.
Can a Bitcoin transaction be traced?
Bitcoin is traceable because all transactions are recorded on a public blockchain. Wallet addresses are not linked to names by default but can be traced through patterns. You can track your own or others’ transactions using blockchain tools.
Which crypto is not traceable?
Unlike selectively transparent alternatives (e.g. Zcash), Monero is the only major cryptocurrency where every user is anonymous by default. The sender, receiver, and amount of every single transaction are hidden through the use of three important technologies: Stealth Addresses, Ring Signatures, and RingCT.
Does the government know if I have Bitcoin?
Bitcoin transactions are permanently recorded on a public blockchain. If your wallet is linked to your identity, your transactions can be tracked. Government agencies can track your identity if you’ve provided Know Your Customer (KYC) information to your exchange.