Bitcoin cryptocurrency cryptomonnaie coin in a wallet with other euro coins in Clermont-Ferrand France on May 7 2025. (Photo by Romain Costaseca / Hans Lucas / Hans Lucas via AFP) (Photo by ROMAIN COSTASECA/Hans Lucas/AFP via Getty Images)
Hans Lucas/AFP via Getty Images
2025 marks a pivotal year for cryptocurrency investors, particularly ones using offshore wallets. With the IRS increasing its focus on cryptocurrency compliance in recent years, navigating the evolving reporting requirements can be difficult for investors given the fairly new area of this asset. While the U.S. has experienced a shift in reporting obligations towards less reporting, offshore and foreign reporting requirements have been increasing.
The Evolving Regulatory Landscape For Cryptocurrency
Prior to the executive order signed in April 2025, the IRS established cryptocurrencies as property or a capital asset, subjecting transfers and sales of cryptocurrency to capital gains tax. However, the decentralized and pseudonymous nature of digital assets has historically being difficult for enforcement. To mitigate some of the hurdles, the IRS implemented new measures to enhance transparency and compliance.
Form 1099-DA mandated that brokers report digital asset transactions to both the IRS and taxpayers, similar to Form 1099-B for traditional securities. By 2026, brokers will also be required to include the cost basis of digital assets, providing a clarity into gains and losses for tax purposes.
Additionally, the IRS had emphasized the importance of wallet-by-wallet accounting which can be cumbersome and administratively a heavy lift. Previously, many investors used a universal accounting method, pooling all cryptocurrency holdings across various wallets and exchanges. However, the IRS required taxpayers to track and report each wallet separately.
International Cryptocurrency: The OECD’s Crypto-Asset Reporting Framework (CARF)
The Organisation for Economic Co-operation and Development (OECD) has developed the Crypto-Asset Reporting Framework (CARF), aiming to enhance global tax transparency in the crypto space. Under CARF, Crypto-Asset Service Providers (CASPs) are required to collect and report information on users’ tax residences and taxpayer identification numbers. This data will be shared among tax authorities worldwide to ensure compliance and track tax evasion.
CARF signifies a concerted global effort to address the challenges posed by the borderless nature of digital assets. For U.S. taxpayers, even though the U.S. is a not a party to the OECD, foreign crypto holdings are increasingly within the reach of domestic tax authorities, highlighting the importance of full compliance with reporting obligations.
Cryptocurrency Reporting Requirements: Forms 8938, FBAR, and 3520
U.S. taxpayers with offshore crypto holdings are subject to varous additional reporting requirements:
- Form 8938 (Statement of Specified Foreign Financial Assets): Under the Foreign Account Tax Compliance Act (FATCA), U.S. taxpayers holding foreign financial assets exceeding certain thresholds must report them on Form 8938. This includes cryptocurrencies held in foreign accounts.
- FBAR (FinCEN Form 114): Taxpayers with foreign financial accounts, including crypto wallets, exceeding $10,000 at any point during the calendar year must file an FBAR. Failure to do so can result in substantial penalties.
- Form 3520: Taxpayers must report transactions with certain foreign trusts and the receipt of certain foreign gifts. If a taxpayer receives crypto assets from a foreign trust or individual, Form 3520 may be necessary.
Non-compliance with these reporting requirements can lead to significant penalties, including monetary fines and potential criminal charges. Therefore, taxpayers must understand and fulfill their obligations in a timely and complete manner.
Increased IRS Enforcement and Audits with Cryptocurrency
In recent years, the IRS had ramped up its enforcement efforts in connection with cryptocurrency transactions. Form 1099-DA and wallet by wallet accounting, would have enabled the IRS to identify underreported income and ensure compliance more seamlessly.
Additionally, the IRS has employed data analytics and blockchain tracing tools to identify non-compliant taxpayers. By analyzing blockchain transactions and cross-referencing them with tax filings, the IRS can detect discrepancies and pursue enforcement actions.
Best Practices for Crytpocurrency Holdings Compliance
,To comply globally, adhering to stricter reporting standards is prudent. Taxpayers should consider and implement the following:
- Maintain Detailed Records: Keep comprehensive records of all crypto transactions, including dates, amounts, involved parties, and the purpose of each transaction.
- Use Reliable Tax Software: Utilize reputable cryptocurrency tax software to track transactions across multiple wallets and exchanges, ensuring accurate management and accounting.
- Consult Tax Professionals: Engage with tax professionals who are experienced in cryptocurrency to ensure compliance with all reporting requirements and to integrate effective tax strategies.
- Stay Informed: Regularly review IRS updates and guidance on cryptocurrency taxation to remain compliant with evolving regulations.
As the IRS priorities waver and international bodies. Including the OECD intensify their focus on cryptocurrency taxation, reporting compliance can be especially cumbersome because both the application and the extent can be uncertain, especially across conflicting jurisdictions. Proactive compliance mitigates the risk of audits and penalties while contributing to the broader goal of financial transparency, especially with digital assets.