Don’t Risk It: Top Crypto Tax Mistakes That Could Trigger IRS
Introduction
With the cryptocurrency market booming and tax season in full swing, the IRS is sharpening its focus on digital asset holders. Gone are the days when crypto flew under the radar. Now, even small errors in your crypto tax reporting could trigger an IRS audit.
In 2025, as new rules and stricter enforcement come into play, it’s more important than ever to understand how the IRS treats cryptocurrencies, and which crypto tax mistakes can lead to serious consequences.
Why Is the IRS Cracking Down on Crypto?
The IRS classifies cryptocurrency as property, meaning it’s subject to capital gains tax when sold or traded. But that’s not all—airdrops, staking rewards, NFT sales, and even crypto income from freelancing must be reported as ordinary income.
With the rise of blockchain analytics, the IRS can now track crypto activity across most exchanges, including major platforms like Coinbase, Binance US, Kraken, Robinhood, and eToro. International and decentralized exchanges are increasingly in the spotlight too, thanks to global data-sharing agreements.
Simply put, if you’re trading or earning in crypto, the IRS probably knows about it.
Mistake #1: Not Reporting Crypto Transactions at All
The biggest mistake crypto holders make is ignoring their crypto activity on their tax return. Many assume that if they didn’t convert their crypto into cash (USD), there’s nothing to report. This is a myth.
Every crypto-to-crypto trade is a taxable event, as is:
- Spending crypto on goods or services
- Receiving rewards via staking or mining
- Earning crypto through freelancing or business
- NFT sales or swaps
- Using DeFi platforms for swaps or lending
The IRS now includes a digital assets question on Form 1040, and failure to answer truthfully can raise audit flags.
Mistake #2: Underreporting or Misclassifying Income
Crypto income isn’t limited to gains from selling your tokens. Many users fail to report airdrops, staking rewards, or mining income as ordinary income at the time it’s received.
Here’s how to think about it:
| Source | Tax Treatment |
| Airdrops | Ordinary income at FMV |
| Staking/Masternode | Ordinary income when earned |
| Mining | Income + self-employment tax |
| NFTs | Depends on use (income vs gains) |
All of these earnings must be reported at fair market value on the date received. If you don’t report them properly, you’re exposing yourself to penalties, interest, and potentially IRS enforcement action.
Mistake #3: Poor Record-Keeping and Missing Cost Basis
To correctly calculate your capital gains or losses, you need to know the cost basis of each crypto asset. That includes:
- The date you acquired the asset
- The purchase price (in USD)
- The sale date and sale price
- Fees associated with the transaction
Without these details, your tax calculations will be incomplete—and the IRS could reject your filing or flag you for an audit.
Use crypto tax tools like:
These tools integrate with top exchanges, automate cost basis tracking, and help generate IRS-ready tax reports.
Mistake #4: Ignoring DeFi, NFTs, and Cross-Chain Swaps
Crypto is evolving—and so are taxable events.
If you’re using Uniswap, PancakeSwap, or Curve, providing liquidity, borrowing crypto, or earning yield, you must track and report every taxable action. Even if your activity seems “within the blockchain,” it’s still taxable.
Similarly, the IRS treats NFT sales as property transactions. This means:
- Minting and reselling an NFT creates a capital gain (or loss)
- Earning royalties is treated as ordinary income
- Buying NFTs with ETH or SOL triggers a taxable crypto-to-crypto swap
Failure to understand these nuances could cause underreporting—and trigger a crypto tax audit.
Mistake #5: Using Foreign or Non-Compliant Exchanges Without Disclosing
Using international exchanges or DeFi protocols doesn’t exempt you from reporting.
If you hold more than $10,000 in foreign crypto accounts, including wallets on exchanges like KuCoin, Bybit, Gate.io, or MEXC, you may be subject to:
- FBAR (FinCEN Form 114)
- FATCA (Form 8938)
Failure to report these holdings can lead to huge penalties, even if you didn’t realize you were supposed to disclose them.
Don’t assume decentralized means invisible. The IRS is watching on-chain wallets too, thanks to powerful blockchain forensics tools.
Mistake #6: Assuming the IRS Won’t Notice
Many crypto users believe their activity is too small or obscure to matter. However, IRS enforcement is expanding, and new funding under the Inflation Reduction Act means more audits, more subpoenas, and more crypto-specific investigations.
Plus, exchanges like Coinbase, Kraken, and Robinhood are now issuing Form 1099-DA, a new standardized crypto tax form that goes straight to the IRS.
If the numbers on your tax return don’t match what the IRS receives from these platforms—you may get audited.
Best Practices to Avoid a Crypto Tax Audit
- Answer the digital asset question honestly on Form 1040
- Track your crypto activity throughout the year, not just at tax time
- Use crypto tax software to compile reports and calculate gains/losses
- Don’t forget airdrops, staking, NFTs, and DeFi earnings
- Report all exchanges, including offshore and DEX platforms
- Consult a crypto-savvy tax professional for complex portfolios
- Keep records for at least 7 years, including screenshots, transaction IDs, and CSV exports
Conclusion
As the IRS strengthens its grip on crypto compliance, the risks of making tax mistakes grow bigger each year. From unreported trades to overlooked airdrops, even small missteps can lead to major headaches.
But the good news is—you can avoid trouble by staying proactive, organized, and honest. By understanding the top crypto tax mistakes and using the right tools, you’ll keep your finances in good standing and minimize the risk of an IRS audit.
Because when it comes to crypto taxes, one rule matters most: don’t risk it.