The IRS Upgrades Regulation on Crypto Assets: From Sky-High Seizures to Real-Time Monitoring, New Rules Coexist with Privacy Challenges

The IRS ( is steadily expanding its crypto assets regulatory capabilities, shifting from investigations targeting specific individuals to comprehensive reviews of large exchanges. By utilizing "John Doe subpoenas" and advanced Blockchain analysis tools, the IRS is able to track crypto assets transactions in real-time, significantly enhancing the enforcement of tax compliance. Experts point out that although the new reporting system aims to simplify processes, the complexity of compliance and the invasion of privacy remain prominent issues.

Evolution of Law Enforcement Strategies: From Sky-High Seizures to Large-Scale Screening

Since 2017, the IRS has undergone a fundamental shift in its strategy regarding the regulation of Crypto Assets. In the fiscal year 2021, the agency's criminal investigation division seized $3.5 billion in assets through Crypto Assets, accounting for 93% of its total asset seizures that year. Subsequently, the agency shifted its focus from sporadic high-value cases to a more systematic and widespread examination. As of 2023, the IRS has initiated 216 investigations and sent "soft letters" to 15,000 identified crypto users through exchange data, aiming to encourage them to comply proactively.

Core Tools: Anonymous Invoice and Blockchain Analysis

The IRS primarily relies on two main tools to expand its enforcement scope:

1. "John Doe Summonses": This type of summons allows the IRS to request user data from exchanges for a "determinable group or category" without having to prove prior wrongdoing by each individual. Experts point out that the court's approval threshold for such summonses is "extremely low", providing the IRS with broad examination powers.
2. Blockchain Analysis: The IRS is combining user data provided by exchanges with public blockchain information to create comprehensive financial profiles, enabling real-time reviews of users' tax compliance. In the words of legal experts, this is akin to a "financial ankle monitor," allowing the IRS to conduct "near-perfect surveillance" of users' on-chain activities.

Despite objections from privacy advocates who appealed to the Supreme Court on the grounds of violating Fourth Amendment rights, the Supreme Court declined to hear the case in July 2024, providing stronger legal grounds for IRS enforcement actions.

Comparison of Old and New Tax Forms and Compliance Challenges

To address the historical tax reporting issues, the IRS has launched a new 1099-DA reporting system. This system will require crypto exchanges to report users' total transaction income starting in 2025, and to report cost basis starting in 2026.

However, experts warn that although the new regulations aim to reduce past confusion (such as the tax mismatches caused by the previous 1099-K form due to a lack of cost basis information), the system's inability to consolidate all transaction information of users across different exchanges, wallets, or on-chain protocols may still lead to new "information mismatches" and confusion. Moreover, this "enforcement-focused" strategy may also create significant friction with the crypto community's pursuit of decentralization and anti-government sentiment.

Impact on the Crypto Market and Expert Opinions

Experts believe that the IRS's regulatory upgrade marks a shift in crypto tax from a "voluntary reporting model" to a "mandatory compliance model." This greatly raises the compliance threshold for crypto businesses, while also meaning that even unintentional violations from the past are more likely to be detected, leading to fines or even criminal charges. This trend has also sent a clear signal to crypto platforms: they must strengthen their anti-money laundering (AML), know your customer (KYC) processes, as well as their data collection and reporting capabilities.

Conclusion

From the perspective of tax compliance, the era of anonymity for Crypto Assets is essentially over. The IRS's latest initiatives indicate that regulators are undertaking unprecedented deep regulation of the digital asset space by combining traditional legal tools with cutting-edge technology. Although this move aims to ensure tax fairness, how ordinary crypto users deal with the complexities of cross-platform tax reporting and protect their personal privacy under tightening regulations remains a significant challenge that must be faced in the future.