Do not think that just because digital exchanges are not broker-regulated by the IRS and digital exchanges are not obligated to issue a 1099 form reporting transactions, that your crypto currency transactions will always be a secret. The Federal government is cracking down on non-compliant traders and pursuing criminal prosecution when it feels its appropriate.
Just over 800 taxpayers declared cryptocurrency-related capital gains or losses in 2013, 2014, or 2015, despite the fact that hundreds of thousands of individuals sell or purchase Bitcoin on Coinbase. Just earlier this year IRS was successful in getting a U.S. District Court Judge to order Coinbase under an IRS Summons to turn over 14,000 users. Those users will have some explaining to do to the IRS why they did not report their crypto transactions.
IRS Audits & Litigation
After years of analyzing data from third parties involved in the cryptocurrency exchanges, the IRS announced on July 26, 2019 that it has started sending letters to cryptocurrency owners advising them to report their cryptocurrency transactions and pay their taxes. More than 10,000 taxpayers have been identified by IRS as being involved in cryptocurrency transactions but who the IRS believes may not have been compliant in reporting these transactions on their tax returns.
The IRS is expected to issue new IRS initiatives on taxpayer compliance and reporting obligations for crypto currency (e.g. Bitcoin, Coinbase) transactions. The IRS is expected to affirm its position on crypto currency as property rather than cash, and to step up monitoring to increase compliance, consider criminal investigations and prosecutions for failing to properly report crypto-currency transactions and to define proper reporting and tax treatment for “mining” and exchanging crypto currency.