The IRS has expanded its crypto surveillance efforts since 2017, using John Doe summonses and blockchain analytics to trace transactions in real-time. Major exchanges like Coinbase faced scrutiny, resulting in $3.5 billion in crypto seizures in 2021. The agency opened 216 examinations and sent 15,000 “soft letters” to identified crypto users.

Court-approved summonses targeted users of Kraken, Circle, and Poloniex, signaling a broad approach to identify tax non-compliance across exchanges. The IRS’s focus on digital assets led to a potential 75% non-compliance rate among taxpayers identified through exchanges. The agency combined exchange data with blockchain analytics for comprehensive financial profiles.

The upcoming 1099-DA reporting regime aims to improve reporting accuracy but may still lead to errors and confusion. The IRS has removed an anti-DeFi broker rule, while enforcing compliance through John Doe summonses. Crypto firms face increased regulatory scrutiny, emphasizing the importance of robust reporting and internal controls.

Privacy advocates lost ground as the Supreme Court declined to hear a case involving IRS access to Coinbase data. The agency’s real-time monitoring of blockchain activity raised concerns about user privacy. While the Biden administration removed a DeFi broker rule, centralized exchanges still face reporting obligations that may alienate compliant users.

Enforcement-heavy approaches risk alienating compliant users, creating friction with high-value taxpayers. While no systemic targeting of crypto users has been reported, matching programs can generate notices based on inaccurate exchange records. The IRS did not immediately respond to requests for comment on the story.

Read more at Yahoo Finance: Inside the IRS’s Expanding Surveillance of Crypto Investors