IRS Targets On-Chain Wallets: 86% of Taxable Crypto Transactions Escape Reporting Framework

Don't just focus on forms for crypto tax reporting: the IRS is shifting from "form enforcement" to "wallet enforcement".

Written by: Shehan Chandrasekera

Compiled by: AididiaoJP, Foresight News

Most crypto investors have two sayings in mind. One is: if I receive a 1099-DA in my email, I have a basis for tax reporting. The other is: if I don’t receive this form, the tax authorities can’t see it.

Both of these statements are becoming increasingly untenable.

Shehan Chandrasekera, a contributor to Forbes' digital assets section and a crypto tax expert, points out that the IRS can now see crypto activities that clearly extend beyond the scope of the 1099-DA. Chainalysis' latest "Crypto Tax Report" puts it bluntly: by 2025, the potential taxable crypto activities on-chain worldwide could reach at least $457 billion; meanwhile, the enforcement logic is shifting from "looking at forms" to "looking at wallets".

Before tax season arrives, it’s important to understand these changes.

$457 billion is not a tax bill, but a lower limit

The $457 billion estimated by Chainalysis is not the tax already collected by various countries, nor is it the theoretical tax owed by taxpayers; rather, it represents the scale of "potential taxable activities". It combines three types of on-chain behaviors: realized gains from transactions, income from activities such as mining, staking, lending, and gambling, and payments denominated in crypto assets.

The report covers six major public chains: Bitcoin, Ethereum, Solana, Tron, BNB Smart Chain, and Base. Activities such as internal matching on centralized exchanges, staking within the platform, and lending within the platform are not included in the statistics. Therefore, the $457 billion is more like a lower limit than an upper limit.

By region, North America accounts for about $134.6 billion, the European Union about $125.1 billion, and East Asia about $54.7 billion. By country, the United States alone accounts for $112.6 billion, including $64.6 billion in payments, $30.1 billion in gains, and $17.9 billion in income. Germany, China, the UK, and India follow.

These numbers do not determine how much tax anyone should pay. They indicate something else: crypto activities have grown large enough to enter the radar of tax enforcement in various countries, while traditional reporting forms are far behind the actual scale of on-chain activities.

1099-DA and CARF only cover a small part

In the U.S., the form most familiar to investors is the 1099-DA. This form corresponds to reports from brokers on centralized platforms, mainly covering information about digital asset sales completed through regulated brokers.

Internationally, the corresponding framework is the OECD's Crypto Asset Reporting Framework (CARF). It requires eligible centralized exchanges, brokers, some retailers, and wallet service providers to collect customer information and report it to the relevant tax authorities. Dozens of countries plan to exchange information according to CARF starting in 2027.

The problem lies in the coverage.

Chainalysis estimates that only about 14% of the taxable activities on-chain captured in its statistics can be directly captured by frameworks like CARF. The remaining 86% falls under decentralized exchanges, peer-to-peer transfers, on-chain income streams, and crypto payments. These activities typically do not go through centralized brokers that would issue a 1099-DA and do not necessarily fall within the actual scope of CARF.

In other words, the 1099-DA is not a comprehensive view of crypto taxation; it is merely a slice of the centralized entry point.

This is not a clever loophole but a structural gap in third-party reporting: forms can only see the segment that has "intermediaries, accounts, and real names". Self-custody wallets, DEXs, cross-chain bridges, DeFi protocols, staking and lending yields, peer-to-peer transfers, and offshore platforms often do not appear on the same form.

A gap does not mean invisibility.

Exchanges know you, chains know where the coins go

What truly changes enforcement capabilities is connecting these two pieces of information.

When taxpayers withdraw coins from centralized exchanges to private wallets, the exchange knows who is withdrawing the coins. Once the coins are on-chain, subsequent flows, splits, exchanges, cross-chain movements, and entry into specific protocols will leave public traces. Blockchain analysis aims to match "this person" with "these addresses".

The method described by Chainalysis focuses on wallet clustering and attribution analysis: grouping addresses with similar behavior patterns and frequent fund transfers, and then determining who might control this group of addresses. This allows for the observation of DEX transactions, cross-chain bridge usage, peer-to-peer transfers, and interactions with specific services.

Thus, enforcement can shift from solely revolving around 1099 forms to being wallet-centric. Activities not listed on a form do not automatically mean that the tax authorities cannot reconstruct them.

There is a similar background domestically in the U.S. Public reports have mentioned that around 2022, the "crypto tax gap"—the gap between taxes paid on crypto transactions and taxes owed—was about $50 billion annually, accounting for about 8% of the overall tax gap that year. Related estimates from Congress suggest that the 1099-DA could bring in about $28 billion in revenue over the next decade. However, like many domestic reforms in various countries, as long as taxpayers can trade outside the reporting system in their country of residence, the effectiveness of purely domestic form reforms will be diminished.

This is why tax authorities are increasingly focusing on on-chain data rather than just waiting for the next 1099.

Even if the form arrives, the cost basis is often still blank

Even when activities appear on the 1099-DA, the form itself is often insufficient.

Brokers may know that you sold a certain asset, but they may not know where it was originally purchased, what the purchase price was, whether it was transferred back from a self-custody wallet in between, whether the same asset was swapped on a DEX, whether new tokens were generated during staking, or whether this batch of coins is mixed with others.

The most common path for crypto assets is actually "buy at one place, store at another, sell at another". Coins moving back and forth between exchanges, hardware wallets, hot wallets, and cross-chain bridges is the norm, not the exception. CARF and 1099-DA are typically not tools for tracing the entire historical ledger. Exchanges often report disposal actions rather than complete cost bases.

As a result, a common illusion arises: receiving a 1099-DA leads one to believe that filling out the form is sufficient. In reality, the missing segment on the form is precisely the most critical part for calculating gains and losses.

Chainalysis also emphasizes that even if countries obtain CARF data, they will still face several structural gaps: assets frequently transfer between different platforms; historically, most coins first enter private wallets; the framework itself does not look back; most DEXs are actually difficult to include; peer-to-peer, self-custody, and offshore platforms without reporting connections fall outside; mining rewards, staking yields, lending income, and many goods and services payments are also not within the core collection scope; even if sales are reported, purchase costs may still not match; and many reported data are aggregated rather than at the transaction level.

For taxpayers, the conclusion is very practical: the 1099-DA is a clue, not a complete ledger.

What is truly complete is only one’s own records

Putting these pieces together is not complicated.

Crypto taxpayers need not just "record accounts with forms, leave accounts without forms aside", but a complete ledger covering all exchanges, all wallets, and all on-chain activities. Which transactions are purchases, which are sales, which are income, which are merely transfers between one’s own addresses, and how cost bases are carried over must all be verifiable.

The risks ahead are no longer abstract. The coverage of the 1099-DA is expanding, the IRS will receive more third-party data, which will be used to cross-check with the numbers taxpayers report themselves. Meanwhile, beyond broker data, there are also wallet paths that can be reconstructed through blockchain analysis. If the content you report does not match the picture that can be restored from "form data + on-chain data", the risk of audit will shift from a theoretical possibility to an operational gap.

Only one’s own records can connect these pieces.

For those who have already moved assets to self-custody wallets, used DEXs or DeFi, moved assets between multiple platforms, or interacted with both domestic and foreign platforms, this point is particularly hard. Not because these actions themselves equal tax evasion, but because they are not visible on a single 1099-DA, yet are increasingly likely to appear in wallet-level analysis.

Before tax season, rather than assuming "if there’s no form, it means no one sees it", it’s better to ask a more practical question: can your records withstand scrutiny from both forms and chains?