Approximately 70 million people in the U.S. now own cryptocurrency. However, a recent report by CoinTracker found only 49% of investors understand that crypto is taxable anytime it is sold.
Of those who do report on crypto taxes, research shows there is major uncertainty on whether it is being filed correctly. According to the crypto tax platform, Awaken Tax, more than half (52%) of crypto investors were concerned about receiving a penalty from the IRS this tax season.
“This year, the IRS introduced a number of regulations to clamp down on crypto tax evasion, and we’re not going to see it slow down in 2027,” said Andrew Duca, founder of Awaken Tax. “Next year, centralized crypto exchanges (CEXs) will begin reporting cost basis information directly to the IRS. The changes will mean the original value of an asset will need to be reported to the IRS, bringing cryptocurrency in line with traditional brokerage accounts.
“Failure to report crypto income correctly can result in penalties of up to 75% of the unpaid tax amount, plus hefty interest charges,” he added.
To help investors get ahead, Duca is urging users to take proactive steps this year to avoid hefty IRS penalties next year.
He adds: “These changes mean any discrepancies between exchange records and personal tax filings will become far more visible to the IRS. Although we’re still working out exactly what it will look like, there are some practical steps investors can put in place now to make 2027 reporting much easier.”
1. Stop transferring crypto into exchanges to sell: “Bringing assets onto an exchange from an external wallet creates a cost basis mismatch, and there is no record of what you originally paid,” Duca said. “Instead, only transfer stablecoins such as USDC between your centralized exchange and external wallets. Stablecoins don’t fluctuate in price, which means there’s no taxable gain to misreport.”
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2. Align your exchange’s tax method with your filing software: “Most exchanges allow users to select a cost basis accounting method, such as FIFO (first in, first out) or HIFO (highest in, first out),” he said. “If your tax software uses FIFO, your exchange must also be set to FIFO. A mismatch between the two will produce conflicting records that are extremely difficult to merge when filing season comes around.”
3. Avoid transferring cryptocurrency between exchanges: “Moving Bitcoin or other crypto assets from one exchange to another is one of the fastest ways to create a reporting nightmare. Without a clear chain of cost basis records across platforms, you risk facing inflated tax bills or being scrutinized by the IRS,” Duca said.
He adds: “Ideally, you need to treat your centralized exchange as a siloed experience. You trade in it, and only transfer things that don’t fluctuate in price out of it. Being aware of this now and starting to put steps in place this year will make the 2027 tax season much less stressful, safe in the knowledge that you’ll be compliant with the latest IRS crypto tax regulations.”
Photo credit: pcess609/iStock
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