If you sold Bitcoin through Coinbase last year and figured the IRS would never notice a small discrepancy on your return, that bet no longer holds. Starting with the 2025 tax year, every centralized crypto exchange in the United States is required to file a new form, the 1099-DA, reporting the gross proceeds of your digital asset sales directly to the IRS. That data now feeds into the same automated matching system that has flagged misreported wages and stock sales for decades. And the agency on the receiving end is running roughly twice as many artificial intelligence models as it was just two years ago.
Two shifts, one regulatory and one technological, have converged to create a crypto detection apparatus that simply did not exist before 2025. Here is what changed, what it means when you file, and where the biggest risks of confusion still sit.
Brokers now file Form 1099-DA with the IRS
Final regulations published as TD 10021 in the Federal Register require brokers that facilitate digital asset sales to report gross proceeds on the new 1099-DA for any transaction occurring on or after January 1, 2025. The form works like the 1099-B that stock brokerages have filed for years: it tells the IRS the date of the sale, the asset involved, and the dollar amount the seller received.
Centralized exchanges, including Coinbase, Kraken, and Gemini, fall squarely within the rule’s definition of a broker. The IRS’s own Form 1099-DA guidance confirms that brokers must send the form to both the taxpayer and the agency, covering gross proceeds and, where available, cost basis for covered digital asset dispositions.
There is a critical limitation for this first cycle: most 2025 1099-DA forms will report only proceeds, not cost basis. The IRS acknowledged this gap in an advisory to tax professionals, noting that initial reporting will focus on sale amounts rather than complete gain-or-loss calculations. Mandatory basis reporting for assets acquired after January 1, 2026, is scheduled to begin with the following tax year, though the IRS has a history of delaying implementation deadlines when logistics prove difficult.
That sequencing creates an immediate problem: the IRS will see what you received but often will not see what you originally paid.
The basis gap is the biggest trap for honest filers
Consider a straightforward example. You bought $28,000 worth of Ethereum in 2022, sold it through Coinbase in 2025 for $40,000, and correctly reported a $12,000 capital gain on Schedule D. Your exchange files a 1099-DA showing $40,000 in gross proceeds. Because basis reporting is not yet mandatory, the form says nothing about your $28,000 purchase price.
When that 1099-DA reaches the IRS’s Automated Underreporter program, known internally as AUR, the system sees $40,000 in proceeds and no offsetting basis. It flags the difference between $40,000 and whatever you reported as potential unreported income. You may be entirely correct, but the machine does not know that.
AUR is the same engine that has compared W-2 wage data and 1099-B brokerage data against individual returns for years, generating CP2000 notices when it spots a mismatch. The IRS describes the process in its underreporter notice guidance. Before 2025, crypto largely bypassed this system. Some exchanges voluntarily issued 1099-K or 1099-MISC forms, but there was no uniform obligation and no standardized data format for the matching engine to consume. The 1099-DA changes that entirely.
Tax practitioners expect millions of these forms to hit AUR for the first time during the 2025 filing season. How aggressively the IRS mails CP2000 notices in this first cycle remains an open question. The agency could insert additional human review before flagging crypto-related mismatches, or it could let the automated process run and absorb the response volume afterward. Either way, the burden of proving your basis falls on you.
The IRS’s AI footprint has roughly doubled since 2023
While the reporting rules were taking shape, the IRS was quietly scaling its use of artificial intelligence across compliance operations. Under Executive Order 13960 and Office of Management and Budget directives, every federal agency must inventory its AI use cases. The Treasury Department publishes a consolidated AI Use Case Inventory that includes IRS models, and the IRS maintains its own governance framework documented in its Internal Revenue Manual section on AI governance.
As of early 2026, Treasury’s inventory lists approximately 125 AI use cases attributed to the IRS, roughly double the count from two years prior. These models span fraud detection, return selection, document classification, and taxpayer correspondence routing, among other functions. The inventory does not specify whether a dedicated crypto-matching AI model exists within that count, and the IRS has not publicly confirmed one.
What is clear is that the agency’s capacity to apply machine learning to compliance decisions has expanded significantly during the same window that crypto reporting obligations took effect. Whether AUR’s processing of 1099-DA data relies on traditional rule-based logic, a machine-learning model, or some hybrid is not publicly documented. But the broader trajectory points in one direction: manual-only review of crypto returns is increasingly unlikely for high-value discrepancies.
This expansion has continued even as the IRS faces workforce reductions and budget uncertainty. The agency’s investment in automated tools may partly reflect a strategic bet that algorithms can compensate for fewer human auditors, particularly for the kind of structured data matching that 1099-DA forms enable.
DeFi and self-custody wallets remain outside the net
The current broker definition under TD 10021 targets entities that “regularly provide services effectuating digital asset sales.” That pulls in centralized exchanges but leaves out decentralized finance (DeFi) protocols and non-custodial wallet providers, at least for now. The IRS proposed extending reporting requirements to DeFi front-ends in a separate rulemaking, but that rule has faced legal challenges and its timeline remains uncertain as of mid-2026.
Anyone who traded exclusively through a decentralized exchange like Uniswap or used a self-custody wallet without touching a centralized platform will not have a 1099-DA filed on their behalf. But this does not mean those transactions are invisible or exempt. The obligation to report gains and losses on your return applies regardless of whether a broker files a form. The IRS can still pursue unreported DeFi income through other channels, including blockchain analytics firms it has contracted with since at least 2020.
The detection gap between centralized and decentralized activity is real for the moment, but it would be a mistake to treat it as permanent. The regulatory direction is clear, even if the timeline is not.
What crypto holders should do before filing
Tax practitioners are advising clients to take several concrete steps ahead of filing 2025 returns:
- Download transaction histories from every exchange used in 2025. Most platforms offer CSV exports that include dates, amounts, and transaction types. Do this now; exchanges have been known to limit historical data access after account closures or platform changes.
- Reconstruct cost basis carefully. If you transferred assets between wallets or exchanges before selling, the receiving platform may not know your original purchase price. Third-party portfolio trackers like CoinTracker or Koinly can help consolidate records across platforms.
- Compare your records against any 1099-DA received. If the form shows proceeds that differ from your own calculations, resolve the discrepancy before filing rather than after a CP2000 notice arrives.
- Keep documentation accessible for at least three years. If the IRS questions your reported basis, you will need to substantiate it with exchange records, blockchain transaction hashes, or other evidence. A CP2000 notice typically gives 30 days to respond.
Penalties for underreporting can reach 20% of the underpayment under the accuracy-related penalty provisions of IRC Section 6662, on top of the additional tax owed plus interest. Demonstrating reasonable cause and good faith, anchored by thorough record-keeping, is the primary defense.
The 2025 filing season is the IRS’s proof of concept
For years, crypto operated in a reporting gray zone. Taxpayers were legally required to disclose their gains, but the IRS had no systematic way to verify whether they did. That asymmetry is over for anyone who used a centralized exchange.
The 2025 tax year is effectively a pilot run for the full system. Proceeds reporting is live. Automated matching is active. AI-driven compliance tools are more numerous than ever. Basis reporting, the piece that would let the system distinguish between a real discrepancy and a data gap, arrives next year.
For crypto holders who kept clean records, the new architecture should be manageable, if slightly more paperwork-intensive. For those who did not, the window to reconstruct your transaction history and get ahead of a CP2000 notice is closing. The IRS does not need to audit you individually anymore. It just needs your 1099-DA to not match your return.
Warren Cohen is a finance writer based in Phoenix, Arizona, covering personal finance topics including credit, banking, and beginner investing. He earned his degree in business administration from Arizona State University and began his career working in consumer finance, where he gained direct experience with lending and credit systems. He now writes for personal finance websites and fintech platforms, focusing on clear, practical content that helps readers make informed financial decisions.
