The IRS has long classified cryptocurrency and NFTs (non-fungible tokens) as property, taxed under capital gains rules—but recent enforcement steps suggest its appetite for digital asset oversight is intensifying. Here’s a deep dive into how the IRS treats crypto and digital assets, what’s shifting in 2025, and what taxpayers should know.
Digital Assets Are Property — and Must Be Reported
On the 2025 Form 1040, taxpayers must answer a simple yes/no question: “Did you receive, sell, or exchange a digital asset?” A “yes” response triggers data matching with platforms like Coinbase and Kraken via Form 8949 and Schedule D. While minor crypto activity might feel unwelcome or niche, once checked, it’s vulnerable to immediate IRS scrutiny.
Form 1099-DA: Full Transparency by 2026
Historical lack of standardized reporting allowed taxpayers to understate crypto income without detection. To align crypto reporting with securities and banking, custodial platforms must now send Form 1099‑DA for each customer sale starting in 2025, reporting gross proceeds. By 2026, brokers must also include cost-basis data, giving the IRS visibility into both sides of every transaction and allowing the IRS to cross-check gains and losses more precisely.
Previously, IRS enforcement relied on taxpayer honesty. Now, the burden is shifting to the platforms—especially smaller or decentralized entities—to collect personal data and track taxpayers accurately.
IRS Warning Letters Have Exploded—Up Over 750% in Two Months
Tax platforms like CoinLedger report a staggering 758% increase in IRS warning letters (Letters 6174 and 6174‑A) sent to crypto holders over a 60-day period in mid-2025. These letters range from informational reminders to serious prompts to amend prior returns.
Tax professionals describe clients who had assumed full compliance discovering gaps (e.g., cost base miscalculations or wallet-to-wallet transfers) that triggered outreach.
High‑Profile Crypto Prosecutions Escalate
Recent criminal cases underscore the stakes:
- A Pennsylvania resident pleaded guilty to underreporting over $13 million in NFT sales, facing potential prison time due to his failure to report CryptoPunks gains.
- Another individual admitted to hiding $2.6 million in crypto income, resulting in felony charges and judicial scrutiny.
These examples illustrate that enforcement now extends well beyond high-frequency traders to include NFT flippers and yield farmers alike.
Behind the Scenes: Blockchain Analytics Meet Tax
As part of Operation Hidden Treasure, the IRS now uses advanced blockchain analytics—courtesy of firms like Chainalysis—to connect anonymous wallet addresses with individuals.
For taxpayers, that means claiming privacy by mixing wallets or using foreign platforms offers no shield if tokens touch intermediaries the IRS can trace.
Regulatory Tug-of-War: DeFi Rule Repealed
A proposed IRS rule would have required decentralized finance platforms to treat themselves like brokers—collecting user identities and issuing 1099‑DA forms. In early 2025, Congress overturned that rule via the Congressional Review Act, exempting DeFi protocols from reporting requirements.
That said, centralized exchanges remain fully reportable under the 2025 regime—and enforcement increasingly relies on data, not platform cooperation.
NFTs Get Taxed—Sometimes at Higher Rates
Taxable events for NFTs include sales, trades, and royalty earnings. If an NFT qualifies as a collectible, long-term gains may be taxed at 28%, not the usual maximum of 20%. Major platforms now issue 1099 forms for NFT sales above $600, giving the IRS further transparency.
Why This Shift Matters—and What Comes Next
Analysts estimate that crypto non‑reporting could result in nearly $28 billion in lost revenue over the next eight years. Those projections, rooted in IMF and OECD frameworks, have driven rule changes and enforcement initiatives—changes that are now taking real effect.
With Form 1099‑DA, blockchain analytics, and a clearer regulatory path, the IRS has shifted from passive oversight to proactive enforcement. That means fewer excuses, and more audits—especially for individuals who underreport or misreport crypto activities in their returns.
The Reality for Taxpayers
Rather than treating crypto gains as optional disclosure, taxpayers with digital asset exposure should:
- Honestly answer the digital asset question on Form 1040.
- Reconstruct historic transaction records with wallet IDs, transaction dates, values, and cost base.
- Use software or professionals that parse Form 1099‑DA and support NFT, staking, or DeFi data.
- If gaps exist in prior filings, consider voluntarily amending returns before receiving IRS notices.
Even ordinary investors—not just whales—now face heightened enforcement. Letters like 6174‑A are no longer rare, and automated audit triggers are becoming standard.
Tax experts say audit flags now include:
- Discrepancies between crypto income reported on Form 1040 and data received through 1099‑DA.
- Omitted reporting of staking, mining, or decentralized yields.
- Large deductions linked to crypto side hustles without proper receipts or business legitimacy.
The IRS is now a much more effective data collector and regulator in the crypto realm. Even without wrongdoing, passive oversight has shifted to structured enforcement. That means:
- Minor miscalculations can get flagged procedurally.
- Privacy tactics like using multiple wallets no longer guarantee anonymity.
- Amending Returns now often avoids escalation—while ignoring letters can invite penalties or audits.
As IRS visibility improves, crypto tax compliance has moved from “optional nicety” to “necessary diligence.” For those with digital assets, understanding the shift—and acting ahead of enforcement—may be their best protection.
Worried about Crypto Tax Scrutiny? Delia Law Can Help
If you’ve received an IRS letter about digital asset reporting—or worry that past filings may be out of sync with new enforcement trends—Delia Law is prepared to assist. From underreported NFT sales to unfiled crypto staking income, even seemingly minor omissions can trigger serious consequences in today’s enforcement environment.
At Delia Law, we represent clients navigating:
- IRS audits related to cryptocurrency, NFTs, and DeFi activities
- Voluntary disclosures and amended returns involving digital assets
- Criminal tax investigations stemming from unreported or mischaracterized gains
- Discrepancies between Form 1040 and third-party reporting like 1099‑DA
- Complex asset classification and cost-basis reconstruction
We understand that crypto taxation is evolving—and that many filers acted in good faith before current rules took shape. Our team helps individuals and businesses correct course proactively, reduce exposure, and respond strategically when the IRS comes calling.
The IRS’s digital asset enforcement is no longer speculative. It’s active, expanding, and data-driven. If your filings are incomplete or your situation has changed, early legal guidance may prevent a procedural issue from becoming a legal crisis.
Contact Delia Law to discuss your digital asset situation and protect your financial future.
