Reporting Digital Assets: What US Investors Need to Know in 2026

Crypto tax classification

For tax purposes, the IRS views cryptocurrencies as property, similar to stocks or real estate, and not as money. Everything an individual does in crypto tends to fall into one of two buckets for the IRS: capital gains or ordinary income.

For example, if a person buys Bitcoin for US$5,000 and sells it for US$7,000, they realize a US$2,000 capital gain. They pay tax only when they sell the asset, trade for another cryptocurrency or buy something with it.

If a person earns crypto through staking rewards, airdrops, mining or as payment for work, the IRS treats the earnings as regular income. They owe tax on the fair market value of the coins on the day they received them.

Centralized exchanges like Coinbase Global (NASDAQ:COIN) and Kraken must send investors and the IRS Form 1099-DAC, showing sales and gains. They act as custodians because they hold your private keys and control your assets on your behalf. Because they have a traditional business structure and verify your identity, they are classified as brokers.

On the other hand, because of April 2025 legislation, the IRS has revoked previous strict reporting rules for DeFi platforms that do not have traditional gatekeepers, such as Uniswap and Aave. These decentralized exchanges and non-custodial wallets are generally not classified as brokers and do not have to issue Form 1099-DA.

This change occurred when President Donald Trump signed a resolution repealing the DeFi Broker Rule.

However, investors must still legally calculate and report all DeFi gains or income on their own using Form 8949 and Schedule D, even without a 1099-DA.

Regulatory tension and new thresholds

There is clear tension between the Trump administration's desire to deregulate and the practical need for tax revenue to manage national debt in the US. The legislation nullifying the DeFi Broker Rule was a major blow to the IRS’ plan to force decentralized platforms to collect user data and issue 1099s.

While the administration has deregulated certain areas to protect innovation, the White House is pushing the IRS to implement the Crypto-Asset Reporting Framework, an international standard that helps the IRS track US taxpayers' assets in offshore exchanges, preventing wealth from leaving the country tax free.

Additionally, the One Big Beautiful Bill, signed in July 2025, retroactively nullified low-dollar 1099-K reporting, replacing the US$600 threshold enacted by the 2021 American Rescue Plan with the old US$20,000 and 200 transaction limit. The bill also increased the reporting threshold for independent contractors from US$600 to US$2,000 starting in 2026.

Klasing mentioned the "total nightmare" of trying to use 1099-Ks for crypto early on.

Just as the US$600 Venmo rule was delayed due to "paperwork overload" for casual users, he said the crypto world faced a similar mess when the IRS tried to force "gross proceeds" reporting on every small transaction.

The repeal of the rule signals that the Trump administration wants to shield casual users and gig workers from the IRS' forensic net while still targeting "significant income."

However, despite the higher reporting threshold, the tax law has not changed. Even if Venmo doesn't send a 1099-K for a US$5,000 payment, the IRS still expects it to be reported. If its AI tools or blockchain forensics link that Venmo payment to an unreported crypto trade, the lack of a 1099-K won't protect the taxpayer from an audit.

IRS forensics and the cost basis challenge

The technical demands of compliance in 2026 are complicated for a high-net-worth investor.

A major pitfall is cost basis tracking across multi-wallet portfolios; if an investor cannot prove the historical trail of assets in a new wallet, the IRS default is often to treat the entire balance as ordinary income with a zero-cost basis, which is the most expensive tax burden possible.

The IRS uses sophisticated tools to verify trader activity. It first partnered with Chainalysis in 2015 to gain expertise in blockchain forensics. Today, the IRS also uses AI to automatically match the data from Form 1099-DA against filed tax returns, automatically flagging for an automated CP2000 notice or audit if there is a mismatch.

Audit risks are further heightened by specific red flags that trigger specialized IRS forensic teams, including discrepancies between exchange reports and reported sales, obscured transactions using privacy coins and moving substantial crypto amounts between personal wallets and exchanges without clear documentation.

Klasing noted that while tax software is a helpful starting point, it often fails to bridge the gap between gray areas in IRS guidance and the rigorous golden record of transaction history required to survive an audit.

Protecting assets in the age of forensics

While the potential for a crypto tax amnesty or a capital gains holiday for American-made projects exists, Klasing cautioned that such policies require Congressional approval and currently remain speculative.

The stakes for relying on future leniency are high. Penalties can include the seizure of assets, FBAR fines reaching 50 percent of the account value per year and potential prison time.

“Perfect compliance beats perfect privacy every time,” Klasing concluded.

In his view, investors must move from reactive reporting to a proactive defense strategy.

According to Klasing, one of the biggest risks for investors is a data gap. If an exchange shuts down or deletes your history, the IRS will not accept "I lost my data" as a valid defense. Klasing advised that investors manually back up their full transaction history from every exchange. Records should show the date, exact time, number of units and fair market value in US dollars at the time of the transaction, plus the specific counterparty involved for every trade.

He explained that while the IRS often defaults to the first-in, first-out method, taxpayers can achieve better tax outcomes through specific identification, provided they have the meticulous documentation to back it up.

“You need to have some way to prove it if you’re audited or criminally investigated," he said.

Additionally, maintaining a secure, offline list of every wallet address you own will prove that transfers between your own accounts are non-taxable events.

For investors with unreported crypto from prior years, filing an amended return in good faith is often viewed more leniently than waiting for the IRS to catch the error.

And for those with more significant omissions, the Voluntary Disclosure Program offers a pathway to come forward, pay back taxes and potentially avoid criminal prosecution or the harshest 75 percent fraud penalties.

“If you have this type of problem, don’t go to just a normal CPA,” Klasing said, emphasizing the benefit of attorney-client privilege. “(CPAs) can become government witness number one against you. They can be forced to testify to anything you tell them; there’s no privilege, especially in a criminal matter.” An attorney can analyze past non-compliance and build a defense strategy without the risk of that information being subpoenaed by the IRS.

In an era where the IRS' forensic reach is as decentralized as the assets it tracks, the only sustainable way to protect your wealth is to prove exactly how you built it, he said.