Tax policy analysts and crypto tax experts recently completed a new investigation. Their findings outline deeply pervasive and alarming failures in the existing crypto tax reporting system. Our multi-year investigation uncovers grievous harm to traders, investors, and miners. The IRS is expected to begin aggressively enforcing new 1099-DA rules and we all must understand what is at stake.

DeFi Tax researchers painstakingly combed through hundreds of transactions by hand. To inform their analysis, they applied 2021-2024 IRS cost accounting rules to raw blockchain data. Their investigation revealed that just the major crypto tax platforms are on track to issue billions of these documents. They expect that the majority of these documents will be fundamentally deficient.

These results suggest that at least some taxpayers will face audits which amount to an audit of certainty. This might lead to automatic fines and even criminal prosecution due to erroneous DA-1099s and inaccurate information. To add to the confusion, the IRS is requiring new 1099-DA forms for tax year 2025 that will be issued by the exchanges.

Users of exchanges are going to be, and should be in many cases, left short in support when sorting through bad 1099-DA’s. They might not discover obvious correction mechanisms and issuer accountability. According to DeFi Tax, some crypto tax software providers changed their algorithms in mid-2023 following the feedback. These cosmetic changes didn’t correct the much larger mistakes.

"None of the platforms we reviewed could produce audit-ready reports with consistent accuracy." - Janna Scott, Head of DeFi Tax

Consumer advocacy leader Janna Scott made inquiries to half a dozen crypto tax platforms and exchanges. Sadly, the answers she got back were either condescending or absent. DeFi Tax is now calling upon regulators, policymakers, and journalists to investigate the crypto tax software ecosystem.

The IRS announced crypto audit suspension in 2023-2024. DeFi Tax interprets this as an indication that the IRS doesn’t dismiss their research as the complaints of a few crackpots. In response to these systemic challenges, DeFi Tax is developing a new solution that is centered around transparency, security, and accountability.

As the findings from this investigation show, the market is in dire need of better and more reliable crypto tax reporting tools. Without them, taxpayers are at serious risk as the IRS dramatically steps up its enforcement of digital asset transactions.

Additionally, the investigation found very predatory actions taken by at least one exchange. The exchange quickly changed its terms of service within 24 hours. This strategic shift was done to thwart users from being able to participate in class action suits against the company.