Bitcoin tax panic is rising because the IRS can see your crypto sales — and you may have to prove what you paid

At 7:12 a.m. on a random Tuesday in February, an email lands with a subject line that looks harmless enough: “Your tax forms are ready.”

For Maya, a part-time designer who bought a little Bitcoin during the 2021 hype, then sold small chunks across a couple of apps when life got expensive, it feels like a routine admin chore.

Click, download, done, back to work. Then the attachment tells a different story.

This filing season is the first time many everyday crypto users will see a standardized form built for digital assets, landing in the same folder as the usual tax paperwork.

Maya opens it expecting the one number everyone cares about: what she paid, what she sold for, what she owes.

She gets one of those things.

The early 1099-DA rollout leans hard on proceeds for 2025 activity, and the missing piece is cost basis.

For 2025 transactions, brokers must report gross proceeds on 1099-DA, and basis reporting generally stays out of the mandatory lane until the next phase.

The form can tell the government, and you, what you sold for. However, it may leave the “what you paid” part for you to rebuild from your own history.

That gap is where the human story lives, because people like Maya treat crypto investments much like many others. They buy on one exchange, move coins into self-custody, bridge tokens, swap around, then sell somewhere else when rent is due.

The paperwork sees the exit. The actual life of the trade sits in the middle.

You still report taxable activity whether or not a broker sends you a form, and you still calculate basis using your own records.

In a world where tax software nudges people to import forms and hit submit, that instruction becomes a pressure point.

It is especially fraught for anyone whose cost basis lives across multiple wallets and venues.

That pressure shows up as confusion, and sometimes overpayment.

Some tax pros have warned that missing basis can inflate the gain people report when they treat an import as complete, a theme that MarketWatch has highlighted.

The frustration is easy to understand. A broker can transmit proceeds at scale.

The messy part, the receipts, stays with the taxpayer.

The form arrives, the math follows

Form 1099-DA is the IRS’s new pipeline for digital asset broker reporting, and 2025 is the first year many brokers step into it.

The IRS frames it as a way to help taxpayers and the agency track digital asset sales and exchanges, with the system built through final regulations and related IRS guidance.

The timeline shapes everything.

For dispositions in 2025, brokers generally report gross proceeds, and the basis box often stays empty because the broker lacks a defensible cost history, especially after transfers.

The IRS instructions lay out the covered versus noncovered framework and explain how brokers handle basis fields when it is unknown or not required.

Basis reporting becomes more real with sales on or after Jan. 1, 2026.

It applies most cleanly when an asset is acquired after 2025 and stays in the same custodial account until it is sold, according to the instructions.

Two people can sell the same token at the same price, and one gets a tidy basis number while the other gets a blank box.

One person stayed put, and the other moved coins around.

That detail turns a tax form into behavior-shaping infrastructure.

A system that rewards a single custodial path makes “stay on platform” the path of least resistance for paperwork.

Self-custody kept the freedom, and it scattered the receipts

Ask 10 crypto users how they tracked cost basis over the past few years, and you will get 10 versions of “I meant to.”

Maya’s version looks familiar.

She dollar-cost averaged ETH on Exchange A, withdrew to a wallet during the “not your keys” wave, swapped into a token on a decentralized app, then later deposited back to Exchange B to sell.

Exchange B can see the sale and report the proceeds.

Exchange B often lacks the full purchase history that would support basis reporting, which is why the IRS architecture leans on covered versus noncovered concepts in the 1099-DA instructions.

That creates a set of normal “how did we get here” stories that turn into tax-time puzzles.

A transfer-in sale: buy on one platform, move to a wallet, deposit somewhere else, sell.

The broker sees the exit, and your earlier path sits outside its records, a scenario baked into the framework in the instructions.

Cost basis soup: multiple buys across venues, partial lot sales, wrapped versions of the same asset, then a clean sell at the end.

That pattern produces tidy proceeds and messy basis, the kind of risk described by MarketWatch.

Wallet-by-wallet shifts: people who tracked everything as one big pool had to adapt to the IRS move toward wallet- and account-level basis tracking.

The IRS provided a safe harbor for reallocating unused basis as of Jan. 1, 2025, detailed in Rev. Proc. 2024-28. That safe harbor matters because it signals how the IRS wants the world to look going forward.

Basis tied to specific wallets and accounts is more traceable and defensible.

Crypto culture encouraged movement. Paperwork prefers containment.

The mismatch letter fear, and the quieter overpayment risk

A lot of people will file and never see a scary letter.

The worry is circulating because the IRS already runs automated document matching, and information returns make that machine faster.

When the IRS sees a discrepancy between information returns and a tax return, it can send a CP2000 notice.

The agency explains the process and response timing in Topic 652, including a typical response deadline of 30 days, with 60 days for taxpayers outside the U.S.

Add 1099-DA to that environment, and proceeds become more visible.

Omissions become easier to spot, and discrepancies become easier to flag.

The system gains more ways to notice when something fails to line up.

The quieter risk is overpayment.

Here is the math in plain English.

If a taxpayer sells for $50,000 and their true basis is $40,000, the real gain is $10,000.

If the $40,000 basis never makes it into the filing workflow, the reported gain can swell to $50,000.

The IRS keeps repeating the responsibility in its guidance: taxpayers calculate basis before filing.

Timing adds heat.

The IRS opened the 2026 filing season for 2025 returns on Jan. 26, 2026, so people are filing while these forms start showing up.

The winter updates that hint at scale, and the direction of travel

Two recent updates sharpen the picture.

First, the IRS posted corrections to the 2025 1099-DA instructions that clarify de minimis and optional aggregate reporting methods.

Brokers report certain PDAP sales only when aggregate sales exceed $600, and the IRS describes optional aggregate reporting thresholds for stablecoins at $10,000 and specified NFTs at $600, according to the IRS corrections.

Second, the IRS excluded 1099-DA from the Combined Federal State Filing Program for tax year 2025.

That points to uneven state-level matching and rollout pace in the first year, according to the IRS notice.

There is also year-one reality on the broker side.

The IRS provided penalty relief tied to good-faith efforts for 2025 reporting, laid out in Notice 2024-56.

That sets expectations for imperfect data as the pipe comes online, and it hints at a tighter enforcement posture later.

At the edges, IRS guidance also lists temporary exceptions or relief for certain transaction types.

Those include wrapping and unwrapping, liquidity provider transactions, staking, lending-style activity, short sales, and notional principal contracts, according to Notice 2024-57.

That list matters for accuracy, because a lot of economically meaningful crypto activity still sits outside the cleanest reporting lane.

Zoom out, and the arc keeps bending toward automatic reporting.

The EU’s DAC8 rules entered into force on Jan. 1, 2026, with the first reporting year set for 2026 and reporting due by Sep. 30, 2027, according to the European Commission’s DAC8 overview.

The OECD’s Crypto Asset Reporting Framework points toward first exchanges of information in 2027, according to the OECD.

Governments build these pipes with a revenue story in mind.

The infrastructure law’s broker reporting provisions were widely discussed as raising around $28 billion over 10 years, a figure cited in industry analysis such as this breakdown.

Crypto used to feel like an app, and now it looks like an asset class with forms and deadlines and matching systems.

The best way to understand the 2025 1099-DA rollout is straightforward.

The form tells part of the story, and your records tell the rest.

This article is informational, and it does not provide tax advice.

The paperwork is already arriving, and the first batch arrived yesterday.

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