For most of crypto’s existence, the IRS treated digital assets the same way it treated rare baseball cards: property, taxable on disposition, but largely on the honor system. That era ended on January 1, 2025. Custodial brokers, including Coinbase, Kraken, Gemini, and most other U.S. exchanges, are now required to report your digital asset sales to the IRS on a new form, the 1099-DA. The agency you forgot to tell about your 2022 swaps now has the sender, the receiver, the date, and the amount.
Cost basis reporting kicks in for 2026 transactions. The “universal method” of pooling basis across wallets is gone. The IRS is cross-referencing 1099-DA data with blockchain analytics. And every category of crypto income, from staking to airdrops to DeFi yield, has its own rules, most of which are still being written.
If your crypto activity is straightforward, a good CPA or tax software is enough. If it is not, you need a crypto tax attorney. This post explains the difference, when each type of professional is the right call, and what to do if the IRS has already come calling.
What the IRS thinks about your crypto in 2026
The starting point for every crypto tax question: the IRS treats digital assets as property, not currency. That means most of what you do with crypto creates a taxable event. The hard part is figuring out which kind of taxable event, what year it falls into, and how to value it.
Here is what counts as a taxable event under current rules:
- Selling crypto for U.S. dollars
- Trading one crypto for another, including stablecoins
- Using crypto to buy goods or services
- Receiving crypto as payment for work, including in a wallet or as DAO compensation
- Mining or staking rewards (taxable as ordinary income at fair market value when received)
- Airdrops (taxable as ordinary income on receipt)
- Hard forks where you receive new tokens
- Liquidation of collateral on a DeFi protocol
- Bridge transactions in some configurations
- Receiving NFTs in exchange for services
What does not trigger tax: buying crypto with U.S. dollars and holding it, transferring crypto between your own wallets, gifting crypto below the annual exclusion, and donating crypto to a qualified charity (which can produce a deduction).
Stablecoins are not exempt. Trading USDC for ETH is a taxable disposition of USDC, even if the dollar value barely moved. The IRS does not care that you mentally treated USDC like cash.
The 1099-DA changes how everything works
The Form 1099-DA went live for 2025 transactions, with brokers furnishing forms to taxpayers in early 2026. The change is not subtle.
For 2025, brokers report gross proceeds. Cost basis reporting is optional. That gap creates a specific risk: if your broker shows the IRS that you sold $40,000 of ETH but does not report what you paid for it, the IRS default assumption is a cost basis of zero. That means the IRS thinks you had $40,000 of taxable gain, when your actual gain might have been $5,000 or even a loss. You have to reconcile this on your return with your own records, or you will get a notice.
For 2026 transactions, brokers must report cost basis for covered digital assets, meaning assets that were acquired and held in the same custodial broker account. Anything you transferred in, anything held in self-custody, anything from a DeFi protocol, anything from before 2026, falls outside that mandatory basis reporting. You are responsible for tracking it yourself.
The IRS also eliminated the universal method of basis tracking. You can no longer treat the same asset across multiple wallets and exchanges as one combined pool. Basis is tracked per wallet, per account, per platform. For active traders or anyone with funds across multiple chains, this is a substantial recordkeeping shift.
What 1099-DA does not capture: DeFi activity (decentralized exchanges, liquidity pools, lending protocols), wallet-to-wallet transfers, NFT sales outside custodial brokers, staking rewards earned outside a custodial account, and most foreign exchange activity. All of those events remain fully taxable. They just are not on the form. The IRS expects you to report them anyway, and is increasingly cross-referencing exchange data with on-chain analytics to find what you missed.
When a CPA is enough
Most crypto holders do not need a tax lawyer. A CPA or enrolled agent who genuinely understands crypto can handle the majority of situations. That includes:
- Reconciling 1099-DA forms with your wallet records
- Calculating gains and losses across exchanges
- Reporting staking, mining, and airdrop income
- Filing Form 8949 and Schedule D
- Identifying tax-loss harvesting opportunities
- Filing Foreign Bank Account Reports (FBAR) and Form 8938 for foreign exchange holdings
- Setting up basis tracking systems for ongoing trading activity
If your situation is “I bought some crypto, held it, sold some, earned a few staking rewards,” a competent crypto-savvy CPA is the right call. Not every accountant qualifies. Ask whether they have actually filed crypto returns, whether they understand the difference between a custodial and noncustodial broker, and whether they have used a crypto tax software like CoinTracker, Koinly, or TokenTax. A general CPA filing your crypto return for the first time will probably miss things.
When you need a crypto tax attorney
A tax lawyer is the right call when the issues stop being about preparation and start being about defense, planning, or significant exposure. Here are the situations that warrant calling a crypto tax attorney rather than a CPA.
You have unreported crypto from prior years
This is the most common reason crypto holders need a lawyer. You traded actively in 2017 through 2024, did not report it accurately, and now realize the IRS may know more than you reported. Maybe you got a CP2000 notice. Maybe you got an Operation Hidden Treasure letter. Maybe you just read about 1099-DA and panicked.
The honest path forward almost always involves amended returns or a voluntary disclosure. Both have legal consequences and both produce communications between you and the IRS that can be used in a later examination. A CPA can prepare the returns, but a tax lawyer should structure the disclosure and protect the attorney-client privilege around what you said and when. CPA-client privilege is much narrower than attorney-client privilege and does not apply at all in criminal investigations.
You have received an IRS notice or audit letter
If the IRS has sent you a notice that mentions digital assets, an audit letter, a summons, or anything from the IRS Criminal Investigation division, stop and call a tax lawyer before responding. What you say in your first response often determines whether the matter resolves with a corrected return or escalates into a full examination. The IRS has been training agents on crypto for years and has entire teams that specialize in digital asset examinations.
You lost crypto to fraud and want to claim a theft loss
The IRS Chief Counsel issued a memorandum in 2025 confirming that victims of investment-based crypto scams may qualify for a theft-loss deduction under IRC Section 165(c)(2), provided the loss arose from a transaction entered into with the intent to earn a profit. That deduction can substantially reduce your tax burden for the year the loss was discovered.
The catch: the rules are technical, the deduction is regularly disallowed when documentation is weak, and the question of which year the loss happened (the year of theft or the year you discovered it) is litigated. A crypto tax attorney can structure the deduction correctly and document it in a way that survives an audit. For more on the recovery side, see our crypto fraud recovery guide.
Your crypto activity raised legitimate criminal exposure
Failing to report crypto income can be a tax misdemeanor or, in egregious cases, a felony. Tax evasion under 26 U.S.C. Section 7201 is a felony with up to five years in federal prison. The IRS has prosecuted crypto cases. So has the DOJ. If you are looking at potential criminal exposure (you intentionally hid significant crypto activity, used mixers to obscure it, or made false statements to the IRS) you need a tax lawyer with criminal defense experience. A CPA cannot help you here, and anything you tell the CPA can be subpoenaed.
You are running a crypto business with tax structuring needs
If you are launching a token, running a DAO, operating a staking service, or building a DeFi protocol, your tax planning is not just a return-preparation question. Entity structure, treatment of token issuances, payment of contributors in tokens, and international tax considerations are all live issues. A tax lawyer working alongside a crypto-savvy CPA produces a structure that holds up. A CPA alone tends to default to whatever is administratively convenient.
You have significant assets and need real planning
For high-net-worth crypto holders, tax planning gets serious. Charitable structures, trust planning, estate considerations, state residency optimization, and timing of dispositions are all areas where a lawyer’s involvement pays for itself many times over. The decision to move from California to Florida before liquidating a large position has a six- or seven-figure tax consequence. So does using a charitable remainder trust to dispose of appreciated crypto. These are legal questions before they are accounting questions.
You have a foreign exchange or wallet exposure
FBAR and Form 8938 obligations are notoriously punishing. Penalties for non-willful failures can reach $10,000 per account per year. Willful failures can reach the greater of $100,000 or 50% of the account balance. The IRS treats foreign crypto exchanges (Bitfinex, KuCoin, Bybit, Binance non-U.S.) as reportable in many cases. If you have not been filing these, talk to a tax lawyer before talking to anyone else.
Common crypto tax mistakes that turn into legal problems
The same handful of mistakes show up over and over in crypto tax cases.
- Treating swaps as nontaxable. Trading ETH for SOL is a sale of ETH at fair market value. It is taxable. Many holders assume crypto-to-crypto swaps are tax-free. They are not.
- Forgetting about staking and DeFi income. Staking rewards, liquidity pool fees, and lending interest are taxable as ordinary income when received. They are also rarely on a 1099-DA.
- Using the universal method after the IRS killed it. The IRS eliminated universal basis tracking. You need per-wallet, per-account records. If your historical method was universal pooling, you may need transition relief filings.
- Reporting only the 1099-DA without reconciling. The 1099-DA is incomplete by design. If you file from the form alone and your wallet activity disagrees, you will get a CP2000 notice.
- Ignoring foreign accounts. A wallet on a foreign exchange that held more than $10,000 at any point in the year may trigger FBAR and Form 8938 obligations. The penalties for missing these are far worse than the underlying tax.
- Trying to fix the past quietly. If you have substantial unreported crypto, filing corrected returns without a structured voluntary disclosure can expose you to penalties and, in serious cases, criminal referral. The IRS treats “quiet disclosures” with suspicion.
- Mixing personal and business crypto activity. Founders who pay themselves in tokens, or treat the project’s treasury as a personal account, create messy tax situations that often require legal cleanup.
What to expect when the IRS contacts you about crypto
The IRS has several ways of telling you it knows about your crypto. Each one means something different, and each one calls for a different response.
- CP2000 notice. The IRS thinks the income on your return does not match what was reported to it. You have 30 days to respond. A CP2000 is not yet an audit. It is a proposed adjustment. A measured response with documentation often resolves it.
- Letter 6173, 6174, or 6174-A. These are educational letters about cryptocurrency reporting obligations. The IRS started sending them in 2019. They are not assessments, but they tell you the agency is paying attention to your return.
- Audit notice (Letter 2202 or similar). A formal examination has started. This is the point at which you should engage a tax lawyer immediately.
- Summons. The IRS is requiring you to appear and produce records. Do not respond without counsel.
- IRS Criminal Investigation contact. CI agents are usually accompanied by their badges and a willingness to talk. Stop talking and call a lawyer the same day.
The default assumption in any IRS interaction should be that anything you say or produce will be used to evaluate whether you owe more tax, owe penalties, or face criminal exposure. This is not paranoia. It is how the system works.
How Murphy’s Law helps
Murphy’s Law is a crypto law firm founded by Liam Murphy, Esq., a University of Pennsylvania Law School graduate whose practice focuses on the legal issues at the intersection of digital assets and federal law. Liam previously practiced at Paul Hastings, Selendy Gay, and McKool Smith, where his work included white-collar defense, complex civil litigation, and post-bankruptcy litigation involving Celsius and other crypto institutions.
For crypto tax matters, Murphy’s Law works with crypto-experienced CPAs to provide:
- Voluntary disclosure structuring for unreported crypto activity
- Response strategy for CP2000 notices, audits, and IRS examinations
- Theft-loss deduction analysis and documentation for fraud victims
- Tax planning for crypto businesses, founders, and high-net-worth holders
- FBAR and Form 8938 compliance for foreign crypto exposure
- Defense in IRS Criminal Investigation matters
- Coordination with CPAs and tax preparers on complex returns
Liam can also refer you to crypto-experienced CPAs when your situation is purely a preparation question and a lawyer is not what you need. Honest assessments are part of the work.
Frequently asked questions
Do I need to report crypto if my exchange did not send me a 1099-DA?
Yes. The IRS requires you to report all taxable crypto transactions whether or not you received a 1099-DA. Foreign exchanges, decentralized platforms, and self-custody activity all generate taxable events that may not be reported by a broker. The absence of a form does not mean the absence of an obligation.
Is the 1099-DA always accurate?
Often, no. The form covers gross proceeds for 2025 but not cost basis, which means it may significantly overstate your taxable income if you do not reconcile it. Brokers also use UTC time, which can shift transactions across tax years for users in non-UTC time zones. Reconcile every 1099-DA against your own records before filing.
Can the IRS see my self-custody wallet?
The IRS cannot directly see balances in a self-custody wallet that has never interacted with a regulated platform. Once that wallet sends to or receives from a custodial exchange that knows your identity, the connection becomes traceable. The IRS uses Chainalysis, TRM Labs, and other blockchain analytics tools to follow these connections.
What is a “voluntary disclosure” and should I make one?
A voluntary disclosure is a structured process for taxpayers with significant unreported income to come forward, typically in exchange for reduced penalties and the avoidance of criminal prosecution. The decision to file one is fact-specific and should be made with a tax lawyer, not a CPA. The IRS has different programs for different situations, and choosing the wrong path can make things worse.
I lost crypto in a scam. Can I deduct the loss?
Maybe. The IRS Chief Counsel memorandum confirms that investment-based crypto scam losses may qualify for a theft-loss deduction under IRC Section 165(c)(2). The deduction depends on facts including whether the transaction was entered into for profit, when the loss occurred, and how thoroughly you can document the theft. A crypto tax attorney can evaluate whether you qualify and prepare the documentation.
Does Murphy’s Law offer free consultations?
Yes. Contact Liam Murphy through murphyslawcrypto.com or call 913-575-0540 to discuss your tax situation.
The IRS already has the data
The shift from voluntary self-reporting to broker-reported, blockchain-traceable, IRS-monitored crypto tax is finished. If your tax position depends on the IRS not finding out, that strategy has expired. The realistic options now are accurate reporting going forward and structured cleanup of the past.
Contact Liam Murphy today for a free consultation or call 913-575-0540.