Does the IRS audit crypto?

Yes, the IRS audits crypto. The Internal Revenue Service treats crypto as property, as the guide to how crypto is taxed in the US explains, and says its efforts to address non-reporting run from taxpayer education to audits to criminal investigations. Since 2019 it has added letters, court summonses and new forms that make crypto activity easier to spot.

How does the IRS audit crypto?

In 2018 the IRS announced a virtual currency compliance campaign that combines outreach with examinations. In 2019 it said it was expanding its work on crypto, including greater use of data analytics. Taxpayers who did not report crypto correctly can owe tax, penalties and interest, and in some cases face criminal prosecution.

An audit, called an examination, is a formal review of a return. Most crypto contact starts with a letter rather than a full audit.

What are IRS crypto letters 6173 and 6174?

In July 2019 the IRS began mailing three letters to more than 10,000 taxpayers it believed may have misreported crypto. Names came from its ongoing compliance work.

1. Letter 6173 asks for a response by a set date. The letter warns that without a response the IRS may refer the account for examination.
2. Letter 6174 is an educational letter that points the taxpayer to their reporting duties.
3. Letter 6174-A says no response is needed, but warns that inaccurate reporting may lead to future civil and criminal enforcement.

The IRS lists all three as voluntary compliance letters and says they are not an audit. People who find mistakes are told to file amended or late returns.

What is the digital asset question on Form 1040?

Every Form 1040 asks whether, during the year, the filer received digital assets as a reward, award or payment, or sold, exchanged or otherwise disposed of them. Everyone filing must tick Yes or No, even with no crypto activity.

Mining, staking, swapping one coin for another and spending crypto all call for Yes. Simply holding crypto, buying it with dollars, or moving it between your own wallets calls for No, unless a transfer fee was paid in crypto. Transactions must be reported whether or not they produce a gain.

How does the IRS get crypto information?

The IRS has several sources:

• John Doe summonses. Courts have authorized the IRS to demand records on groups of customers. In 2021 a court approved a summons to Kraken covering US users with at least $20,000 of crypto transactions between 2016 and 2020, after a similar order for Circle.
• Broker reports. Custodial platforms report customers' sales on Form 1099-DA, with gross proceeds from 2025 and cost basis for certain sales from 2026.
• Your return. Gains go on Form 8949 and income from staking or mining on Schedule 1.

Small transactions are not exempt, as the guide on reporting crypto under $600 explains.

Rules differ by country and change often. Check the tax authority or a qualified professional for your own situation.