IRS Crypto Letters and Form 1099-DA: What the IRS Sees Now

A blockchain is a public ledger that never forgets, and the IRS now has the tools to read it. For 2025 sales, U.S. exchanges issued the first Forms 1099-DA, meaning the IRS now has third-party proceeds data on most custodial crypto activity for the first time. Anyone who gets an IRS crypto letter in 2026 should assume the agency already knows more than the letter says.

What the IRS Has

Broker reporting is the newest source. Final regulations, T.D. 10000 (July 2024), require custodial brokers to report gross proceeds on sales after January 1, 2025 and basis on assets acquired after January 1, 2026, as our post on the final digital asset reporting regulations explains. Backup withholding relief under Notice 2025-33 runs through 2026, so brokers begin withholding in January 2027 on accounts without a certified TIN. Congress repealed the separate DeFi broker rule in April 2025, and U.S. rules adopting the OECD’s Crypto-Asset Reporting Framework for offshore exchanges are still in the regulatory pipeline.

Data from older years primarily came from John Doe summonses. The IRS obtained records from Coinbase, Kraken, Circle, and SFOX, generally reaching U.S. users with $20,000 or more in transactions. The First Circuit rejected a Coinbase customer’s privacy challenge in Harper v. Werfel (2024), and the Supreme Court denied review. We’ve followed that fight from the first Coinbase summons through the SFOX petition.

And then there’s tracing. IRS-CI launched Operation Hidden Treasure in 2021 to follow funds on and off the blockchain. Its fiscal 2025 annual report relies on data analytics and reports $4.5 billion in identified tax fraud, up 111.8 percent.

The IRS Crypto Letter

The IRS started sending crypto letters in July 2019.  There are several different versions. Letter 6174 is educational and asks for no response. Letter 6174-A is a softer warning that transactions may not have been reported correctly; no response is required, but amending is advised. Letter 6173 is the serious one. It tells the taxpayer that the IRS believes returns are missing or omit virtual currency, and it demands a response by the date in the letter.

A Letter 6173 response is a statement to the government about your tax history. It should be handled with care.  If the omitted years involve a handful of forgotten trades, reconstructing basis and filing amended returns usually closes the matter. If they involve large gains moved through exchanges or mixers, remember that the response can become evidence, and counsel should decide how to answer.

When It Turns Criminal

Frank Ahlgren, an early bitcoin investor in Austin, was sentenced in December 2024 to 24 months in what IRS-CI called the first prosecution built solely on crypto tax evasion. He had inflated his basis on about $3.7 million in 2017 bitcoin sales and then moved funds through mixers and in-person cash sales. Waylon Wilcox, who underreported about $13.1 million in NFT gains, pleaded guilty to filing false returns and received probation in April 2026, after paying $3.3 million in tax and $981,000 in interest before sentencing. The difference in outcomes is instructive.

The limitations period matters here. On the civil side, the IRS generally has three years to assess, six if omitted income exceeds 25 percent of reported gross income, and no limit at all for a fraudulent return or a non-filed return. For taxpayers with serious exposure, the IRS voluntary disclosure practice is a path designed to avoid a criminal referral–but it is not the right path for everyone.  And timing is important. A disclosure has to be made before the IRS receives information about the taxpayer from a third party.

But the program’s terms may be changing. IRS-CI proposed in December 2025 to replace the 75 percent civil fraud penalty in voluntary disclosures with a 20 percent accuracy-related penalty for each year in a six-year period.

Since 2019, the individual return has asked whether the taxpayer received, sold, or exchanged a digital asset, and a “no” in a year with such activity can create problems. The ledger remembers every one of those transactions. An IRS crypto letter means the government has probably started reading it.