Crypto warning letters show confusion over tax reporting requirements

The IRS has launched a systematic effort to address widespread non-compliance in cryptocurrency tax reporting through educational warning letters and enhanced broker reporting requirements. Letters 6173, 6174, and 6174-A serve as notifications that the IRS has identified potential discrepancies in how taxpayers have reported digital asset transactions. These letters do not require a formal response but serve as warnings that corrective action is advisable. According to tax professionals, failing to take action following receipt of such letters risks the IRS preparing its own tax return assessment based on available data, commonly known as a Substitute For Return.

The scale of non-compliance is substantial. Research published in March 2026 by the Review of Accounting Studies estimates that only 32% to 56% of U.S. taxpayers with cryptocurrency holdings accurately report their transactions to the federal government. Erin Collins, the IRS' National Taxpayer Advocate, told Congress in June that this data "suggests a significant portion of taxpayers may be out of compliance." Critically, Collins noted that much of this non-compliance stems from "confusion or lack of guidance, not willful neglect," acknowledging a genuine gap in taxpayer understanding of reporting obligations.

The IRS is addressing this visibility challenge through Form 1099-DA, Digital Asset Proceeds From Broker Transactions, which became effective for the 2025 tax year and applies to transactions occurring on or after January 1, 2025. This requirement mandates that digital asset brokers report gross proceeds to both taxpayers and the IRS, fundamentally changing how the agency can monitor crypto investor compliance. The new reporting framework raises the probability that the IRS will identify discrepancies between broker-reported proceeds and taxpayer-filed returns, according to Collins' congressional testimony.

Determining tax liability on cryptocurrency transactions remains operationally complex compared to traditional financial assets like stocks and bonds, according to accountants and tax professionals. This complexity—involving cost basis calculations, timing of gains and losses, and treatment of various transaction types—has contributed to widespread unintentional errors. However, Laura Walter, a certified public accountant and founder of Crypto Tax Girl, cautioned that the IRS will not accept difficulty as justification for non-compliance: "the IRS isn't going to accept 'It was difficult, so I didn't do it'" as an appropriate response.

Investors should also be alert to fraudulent activity. The IRS issued a warning on July 30, 2026, about a scheme targeting cryptocurrency holders using unsolicited letters containing QR codes. Taxpayers receiving such communications should verify authenticity before taking action.