The IRS only captures between 32% and 56% of American cryptocurrency owners in its reporting data, according to a new report from the National Taxpayers Union Foundation. The report, "Cracking the Code: Cryptocurrency Tax Solutions," finds that noncompliance among users of centralized exchanges could be as high as 75%, despite a checkbox added to the 1040 tax form in 2019 requiring filers to disclose digital asset transactions. The report argues that the tax system for digital assets is overly complex, causing unnecessary burden on taxpayers and driving noncompliance rather than preventing it.
The first tax season requiring comprehensive digital asset reporting revealed the scale of the problem. One exchange alone issued nearly 56 million 1099-DA forms, with nearly a third covering transactions worth less than $1 and three out of every four covering transactions under $50. The IRS updated its taxpayer burden estimate to reflect that changes from the Infrastructure Investment and Jobs Act could lead to an increase of 2.9 billion form filings. Many users didn't receive forms until mid-March, and exchanges aren't required to report cost-basis information, forcing digital asset users to calculate this themselves across multiple cryptocurrencies, transaction fees, and variable prices. A recent study estimates that 61% of digital asset users don't understand the new system.
The report finds that Congress's only significant attempt to capture more revenue from digital assets in recent years "worsened the problem" rather than fixing it. According to the authors, "hasty proposals that attempt to categorize vast swaths of digital asset transactions under existing tax rules to boost revenue will only make the issue worse." The report notes that the IRS announced over a decade ago in Notice 2014-21 that it would treat virtual currency as property for tax purposes, yet noncompliance remains high. The experience parallels reporting for transactions on platforms like PayPal and eBay, where Congress reduced the 1099-K reporting threshold from 200 transactions totaling over $20,000 to just $600 with no transaction minimum, only to restore the higher threshold this year after widespread concern about millions of forms for transactions that may not be taxable.
The report proposes several solutions it says would reduce burdens while protecting tax revenue. A de minimis exemption of just $50 for most crypto transactions would reduce the number of tax forms generated by one exchange alone by about 40 million, or 75%. The exemption would spare taxpayers from reporting trivial "gas fees," which are very small amounts of cryptocurrency used to validate transactions and often amount to just a few cents. The U.S. lags other countries on this front: the United Kingdom exempts annual capital gains under £3,000, and Germany exempts digital assets held for more than 12 months entirely. The report also recommends delaying taxation of digital assets created through mining and staking until they're sold or exchanged, avoiding situations where taxpayers owe large tax bills based on peak values only to watch tokens lose most of their value by tax season. It suggests applying wash sale rules and mark-to-market election from securities law to digital assets, and clarifying that lending digital assets through Decentralized Finance protocols—a market estimated at over $200 billion—doesn't constitute a taxable sale.
The report concludes that congressional inaction has left taxpayers and the IRS to navigate a complex system developed through patchwork guidance, with consequences now apparent after the first comprehensive reporting season. Both the Senate and House have held multiple hearings on digital asset taxation, with bipartisan proposals introduced in both chambers. The authors warn it's critical to avoid "hamstringing innovation by placing revenue goals above the need to create a sensible tax framework that encourages further growth." The bottom line: taxpayers would be well served if legislation reduces complexity through policies that address the unique circumstances of digital assets, rather than forcing new technology into tax rules designed for traditional property.