Crypto tax expert warns traders to 'fix your past' ahead of new IRS rule

Three out of four crypto traders in the United States are not reporting all of their digital asset income to the Internal Revenue Service (IRS), according to crypto tax expert Clinton Donnelly.

He warned that the era of limited IRS visibility into crypto activity is ending, and traders who have fallen behind on filings may face increasing enforcement risk.

IRS to receive detailed digital asset reports starting in 2026

In a post on X on Nov. 25, Donnelly explained about a new report by the IRS that would target crypto traders.

The IRS is preparing to implement Form 1099-DA, a new information report that U.S. centralized exchanges must issue starting on Jan. 1, 2026.

The form, mandated under the 2021 Infrastructure Investment and Jobs Act, requires exchanges to report:

• Every sale

• Every swap

• Every exchange

• Every transfer in or out

Donnelly said the change removes ambiguity around taxable events.

“Up until now, the IRS struggled to see the full scope of your trading activity. But that’s changing. Fast.” he wrote.

He added that the new reporting regime will give the agency direct insight into users’ transactions.

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Global reporting set to expand under CARF in 2027

Some traders attempt to avoid domestic reporting by using foreign exchanges or platforms with weak know-your-customer controls. However, Donnelly said those strategies will stop working when the Crypto-Asset Reporting Framework (CARF) begins rolling out globally in 2027.

CARF, developed by the Organisation for Economic Co-operation and Development (OECD), requires participating jurisdictions to collect and share information about crypto users with their home tax authorities.

Under CARF, foreign exchanges must:

• Collect full KYC information

• Identify users’ tax residency

• Record tax identification numbers

• Report all transactions to the user’s home country

Donnelly gave Malta as an example, citing that exchanges operating there would be required to send U.S. traders’ data back to the IRS through Maltese authorities.

Unlike traditional financial reporting, CARF includes no minimum thresholds. This means exchanges must report every sale, swap, and transfer, even movements of small amounts between wallets.

How transfer data reveals self-custody wallets

Donnelly emphasized that transfer reporting gives tax agencies visibility into users’ self-custody wallets.

Because transfers include the sending and receiving addresses, regulators can map which wallets a user controls and follow asset flows across chains.

He pointed to the recent case of early Bitcoin investor Roger Ver, where prosecutors used blockchain forensics to trace wallets, reconstruct historical balances and review transactions going back a decade.

Donnelly said similar techniques will become standard once reporting frameworks connect wallet addresses to verified identities.

Better known as "Bitcoin Jesus," Ver was charged in 2024 with tax evasion and filing false returns after U.S. prosecutors alleged he concealed millions in crypto-related income, using complex wallet structures.

Criminal cases on rise as IRS shifts enforcement strategy

Donnelly argued that the IRS is relying increasingly on criminal charges rather than civil audits when dealing with unreported crypto activity. He said audits require extensive reconstruction of cost basis and transaction histories, while criminal prosecutions have a lower threshold.

“To indict you, the IRS only has to show that you had income, you didn’t report it and you acted with intent,” he wrote.

Penalties can include up to five years in prison per count and fines of up to $250,000.

The statute of limitations also works against taxpayers, he said. While individuals can only amend returns going back three years, the IRS can pursue older cases if it suspects intentional noncompliance.

Donnelly concluded that traders who have not been reporting their crypto activity face increasing risk as the IRS and foreign tax agencies expand their visibility into digital asset flows.

He urged users to address past reporting gaps before international reporting requirements take effect.

“The window to fix your past before global reporting turns on is closing,” he said.

Related: Bitcoin Basics: 'How You Use Crypto Is How You're Taxed'

This story was originally published by TheStreet on Nov 26, 2025, where it first appeared in the Policy section. Add TheStreet as a Preferred Source by clicking here.