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By Jessica Freeman
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The next major crypto scandal will not come from another exchange collapse or spectacular fraud. It will come from ordinary Americans opening IRS notices demanding taxes they do not actually owe.
The federal government is building a reporting system that often captures only part of the story, while millions of investors remain unaware that moving digital assets between wallets and exchanges can erase the information needed to prove what they actually earned. That combination should concern anyone who believes tax enforcement ought to reflect economic reality.
The IRS has entered a new phase of digital asset reporting through Form 1099-DA, requiring exchanges to report cryptocurrency transactions under a phased implementation. Exchanges initially report gross proceeds from sales before comprehensive cost-basis reporting becomes mandatory for many assets acquired, beginning in 2026. The agency expects the system to expand dramatically, projecting that roughly eight billion 1099-DA forms could be filed annually by 2027.
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Those numbers suggest progress. They also reveal a deeper problem. We are building an enforcement-first system before we have built a reporting system capable of accurately measuring what many taxpayers actually owe. The greatest tax risk in crypto is no longer market volatility. It is incomplete information.
Much of the public conversation focuses on artificial intelligence, blockchain analytics and the government’s growing ability to trace digital assets. Those developments deserve attention, but they are not the biggest challenge facing most investors. The IRS can only evaluate the information it receives. When that information is incomplete, taxpayers—not the government—must prove what is missing.
In my experience, the investors who encounter the biggest tax problems are rarely trying to hide income. They are trying to comply with rules they do not fully understand, using records that no longer tell the complete story.
Consider a common scenario. An investor buys Bitcoin for $120,000 on one exchange, transfers it to another platform, and later sells it for $100,000. Economically, the investor lost $20,000. Yet the receiving exchange may only know that $100,000 worth of Bitcoin was sold because it has no record of the original purchase price. Unless the taxpayer can document the cost basis, the IRS receives a report showing proceeds without the context needed to determine whether any taxable gain actually exists.
Many investors assume tax software will automatically reconstruct years of activity across exchanges, wallets, decentralized finance protocols and blockchain transfers. It cannot. Software is only as reliable as the data it receives. Missing transfers, incorrect timestamps, transaction fees, staking rewards, forgotten assets and other gaps can distort the final calculation. A polished report is not necessarily an accurate one.
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I have watched this happen repeatedly. Investors believe they have done everything correctly because they imported data into software or downloaded reports from exchanges. Only later do they discover that their records tell an incomplete story. By then, they are often surprised to learn that the IRS is not responsible for reconstructing years of blockchain activity across multiple platforms. The taxpayer is.
This is not the first time financial innovation has outpaced tax reporting. Traditional brokerages spent years improving cost-basis reporting as new requirements took effect for stocks and options. Over time, brokerage firms developed systems that generally transferred cost-basis information when investors moved securities between institutions. Crypto has not reached that level of interoperability. Digital assets move freely between platforms, but their transaction histories often do not.
The consequences extend far beyond paperwork. I worked with a woman who invested a $600,000 medical settlement into Bitcoin. She realized approximately $160,000 in gains before reinvesting into XRP shortly before its legal battle with the Securities and Exchange Commission caused its value to decline dramatically. When she came to me, she was facing roughly $340,000 in unrealized losses while still owing taxes on gains she had already realized, without the funds needed to pay the tax bill.
Many investors assume later losses simply erase earlier gains. Tax law does not work that way. Once capital gains for the year have been offset, remaining capital losses generally reduce ordinary income by only up to $3,000 per year, with the balance carried forward. By the time many investors learn those rules, the planning opportunities that could have reduced the damage have already disappeared.
That experience points to a larger failure. As Congress continues advancing legislation such as the GENIUS Act and the CLARITY Act to shape the future of digital assets, the conversation cannot stop at market structure and consumer protections. The crypto industry has done an exceptional job teaching people how to trade, but not how those trades are taxed. Investors are surrounded by influencers, newsletters and trading courses promising strategies to build wealth, while one of the biggest determinants of long-term success, tax planning, often receives little attention.
The solution is not weaker enforcement. Tax compliance matters, and regulators should have effective tools to identify legitimate tax avoidance and fraud. But enforcement succeeds only when reporting systems accurately reflect economic reality. Exchanges should prioritize transferring cost-basis information alongside customer assets. Wallet providers and software developers should make transaction histories more portable. Education about taxation should become as common as education about trading strategies.
Investors also have responsibilities. Tax planning should begin before the first transaction, not after an IRS notice arrives. Good records, an understanding of how gains and losses are recognized, and setting aside funds for future tax obligations should become routine parts of investing rather than afterthoughts during tax season.
The challenge is that the current system is moving faster than the infrastructure needed to support it. As reporting requirements expand, the gap between what regulators can see and what taxpayers can prove may grow wider unless exchanges, software providers and policymakers address the underlying data problems.
Crypto has become a permanent part of the financial system. Its tax reporting infrastructure has not matured at the same pace. If policymakers continue expanding enforcement while reporting systems remain fragmented, the people most likely to suffer will not be sophisticated bad actors with teams of lawyers and accountants. It will be ordinary taxpayers who believed they were following the rules but lacked the information needed to prove it.
Jessica Freeman is the founder of Beta Virtual Assistance, where she specializes in helping cryptocurrency investors navigate complex tax reporting requirements. A longtime investor and financial educator, she has spent years helping individuals understand digital asset taxation, regulatory compliance and recordkeeping before problems become costly. Through her work, she advocates for stronger financial education, practical tax planning and clearer reporting systems that protect everyday investors in an increasingly complex digital economy.
The views expressed in this article are the writer’s own.
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