For many years, there was a certain type of constructive ambiguity in the relationship between American bitcoin holders and the IRS. While the cryptocurrency market developed its own institutional infrastructure at a rate that the regulatory framework was unable to keep up with, the agency had made it clear that cryptocurrency gains were taxable, issued guidance that most tax professionals found helpful in a broad sense and insufficient in a specific sense, and been gathering information through existing brokerage reporting channels.
That period is coming to an end. The Coinbases and Krakens, where tens of millions of Americans store their digital assets, must file Form 1099-DA reporting gross transaction proceeds directly to the IRS, beginning with trades made in 2025 and reported in early 2026, according to the IRS’s comprehensive new reporting regulations. There is now far less comfort for cryptocurrency investors due to the shortcomings of the prior system.
| Category | Details |
|---|---|
| Topic | IRS Cryptocurrency Reporting Regulations (2025–2026) |
| Key Form | Form 1099-DA |
| Applicable To | Custodial exchanges (Coinbase, Kraken, etc.) |
| Gross Proceeds Reporting Starts | Transactions from 2025 (reported early 2026) |
| Cost Basis Reporting Starts | Trades from 2026 (mandatory) |
| Tracking Method Required | “Wallet-by-Wallet” — separate gains/losses per account |
| March 2026 Proposal | Digital-only 1099-DA delivery; brokers can drop non-digital customers |
| DeFi Exclusion | Non-custodial/decentralized platforms generally excluded |
| Key Risk | Increased taxable gains, audit risk, year-end selling pressure |
| Regulatory Body | Internal Revenue Service (IRS) |
| Reference Website | irs.gov |
Form 1099-DA works similarly to how stock investors have used standard brokerage reporting for decades: the exchange notifies the IRS of the proceeds from your sale. There is a purposeful and important similarity with stock reporting. It means that instead of depending on self-reporting, cross-referencing exchange data, or waiting for audit triggers, the IRS will obtain direct, standardized information regarding cryptocurrency transactions. The practical effect is mainly administrative for investors who have been careful to monitor and report their gains; the IRS receives the information it was always meant to receive, but with greater consistency. The impact is even more significant for those who have not been as careful.
The next level of complexity is introduced by the cost basis reporting requirement, which will be phased in for trades performed in 2026. The amount you spent for the asset is known as the cost basis, and it is removed from the sale price to establish your taxable gain. The IRS receives your gross earnings but not the computation that determines your real tax due if cost basis tracking is not done accurately.
Exchanges will have to record both sides of the equation when cost basis reporting becomes obligatory in 2026, and the IRS’s “wallet-by-wallet” approach will alter how that computation is done. Investors must compute gains and losses for each wallet or exchange account independently rather than being able to aggregate cost basis across all accounts and exchanges to obtain the most advantageous calculation. This is really more complicated than what was previously permitted for active traders transferring assets across different platforms, and it raises the risk of reporting larger taxable gains even when the total position’s economic reality would indicate otherwise.
Consumer advocates have taken notice of a particular clause in the March 2026 proposal to switch to digital-only transmission of 1099-DA forms: brokers would be allowed to terminate services for clients who refuse to accept electronic delivery. This is a push for digital compliance that also puts pressure on certain cryptocurrency holders who prefer paper documentation, usually older investors or those with less access to technology. It’s unclear if the plan will pass the comment and finalization stages in its current form, but its inclusion shows that the IRS views cryptocurrency reporting as a cutting-edge, digital-first procedure rather than a continuation of the current paper-based tax infrastructure.
Significant industry opposition throughout the comment period led to the DeFi exception, which limits these regulations to custodial platforms that take control of assets rather than extending them to non-custodial players and decentralized protocols. Long-term, this restriction might result in a two-tiered reporting environment where decentralized financing is relatively opaque while centralized exchanges are fully visible to the IRS. It’s also likely that the exclusion is only temporary and that, if the custodial framework is operationalized, a subsequent rulemaking would try to extend comparable standards to the DeFi ecosystem. DeFi is a reporting gap that the agency has acknowledged; the question is how and when it will be closed.
Observing how the cryptocurrency market has reacted to each phase of this legal evolution gives the impression that the sector is undergoing a fundamental shift from an asset class that operated outside the traditional tax infrastructure to one that is actively being absorbed into it. One of the most immediate market repercussions that tax advisors are talking about with their clients is year-end selling pressure, which occurs when investors change their positions prior to required reporting, resulting in an inevitable tax event.
The complete execution of these reporting obligations creates a calendar-driven selling dynamic that didn’t previously exist at this size, and the Bitcoin market in particular has traditionally demonstrated sensitivity to regulatory announcements. The type of forecast that turns out to be more accurate in retrospect than in advance is whether that pressure shows up as a notable price shift in late 2025 and throughout 2026.
