Unreported Cryptocurrency Taxes – Criminal Exposure You Need to Understand

Unreported Cryptocurrency Taxes – Criminal Exposure You Need to Understand

Here’s the uncomfortable truth about cryptocurrency and the IRS: the technology that was supposed to give you financial privacy actually created a permanent public record of every transaction you’ve ever made. The blockchain doesn’t hide anything. It stores everything. Forever. And the IRS has gotten very good at following it.

If you traded Bitcoin, Ethereum, or any other cryptocurrency and didn’t report the gains on your tax returns, you’re not invisible. The IRS almost certainly already has information about your transactions. The only question is whether they’ve gotten around to your name yet.

Welcome to Spodek Law Group. Our goal is to explain exactly how exposed you are and what you can do about it before the situation gets worse. Todd Spodek has represented clients facing IRS scrutiny for unreported crypto gains, and the pattern is always the same – people who thought they were anonymous discover the IRS knows more about their trading history than they remember themselves.

If you have unreported cryptocurrency on your tax returns, call us at 212-300-5196 immediately. The window to fix this is closing.

Why Crypto Tax Evasion Is Different Than You Think

Most people who got into cryptocurrency thought they were operating in an anonymous financial system. Thats the opposite of how it actually works.

Bitcoin and most cryptocurrencies operate on public blockchains. Every transaction is recorded. Every wallet address is visible. Every movement of funds from one address to another is stored permanently. The blockchain dosent hide transactions – it broadcasts them to the entire network and keeps them forever.

Heres the paradox that catches people: Bitcoin was designed to be transparent. The whole point of blockchain technology is that every participant can verify every transaction. People thought they were hiding from the government. They were actually creating the most detailed financial record in human history.

The IRS uses blockchain analytics tools like Chainalysis. These tools can trace transactions through multiple wallets, through exchanges, even through mixing services. When you think your moving crypto “anonymously,” your actually creating a trail that sophisticated software can follow. The IRS can see patterns you dont even remember making.

And heres the thing about the blockchain: it dosent forget. That trade you made in 2017 when Bitcoin first hit $20,000? Its still there. The wash sale pattern you accidentally created? Recorded. The gains you realized when you converted Bitcoin to Ethereum? Documented. Every taxable event is preserved forever, waiting for someone to look.

At Spodek Law Group, we tell clients the same thing: assume the IRS can see everything. Because they probably can. The question isnt wheather there a record of your transactions – its wheather youve reported them accurately.

The Taxable Events You May Have Missed

People think they only owe taxes when they sell crypto for dollars. Thats wrong. Every disposal is a taxable event. Heres what counts:

• Selling cryptocurrency for fiat currency (obvious)
• Trading one cryptocurrency for another (Bitcoin to Ethereum counts)
• Using cryptocurrency to buy goods or services (coffee = taxable event)
• Receiving cryptocurrency as payment for work
• Mining cryptocurrency (taxable as income when received)
• Staking rewards (taxable as income when received)
• Airdrops (taxable as income at fair market value)
• Hard forks that create new coins (taxable)

Every single one of these creates either a capital gain/loss or ordinary income. If you traded Bitcoin for Ethereum in 2021, you realized the gain on your Bitcoin – even though you never touched dollars. If you bought a laptop with Bitcoin, you realized the gain on whatever Bitcoin you spent. The IRS treats each of these transactions separately.

Most people who “didnt report crypto” actually had dozens or hundreds of taxable events they didnt realize were taxable. Thats why the exposure adds up fast.

The IRS Already Has Your Data

If you traded on a major exchange like Coinbase, Kraken, or Circle, the IRS almost certainly has your information. This isnt speculation. Its documented fact.

In 2016, the IRS issued whats called a “John Doe summons” to Coinbase. A John Doe summons is a legal tool that forces a company to turn over customer records even when the IRS dosent know specific names. Coinbase was compelled to produce records for approximately 13,000 customers. Those records included names, addresses, transaction histories, and account balances.

After receiving that data, the IRS sent thousands of warning letters to taxpayers who appeared to have underreported crypto income. Those letters alone resulted in over $92 million in assessments. And that was just Coinbase in 2016.

The IRS didnt stop there. In 2021, a federal court authorized John Doe summonses to both Kraken and Circle. The Kraken summons targeted anyone who conducted at least $20,000 in cryptocurrency transactions between 2016 and 2020. Thats not a high threshold. If you were actively trading during the 2017 bull run, you probably crossed it.

The IRS now has exchange data going back almost a decade. They have your name. They have your transactions. They have the ability to match what you reported on your taxes against what you actually traded. If those numbers dont match, you have a problem.

And its about to get worse. Starting in 2025, cryptocurrency exchanges will be required to file Form 1099-DA for all customer transactions – similar to how stock brokers file Form 1099-B. The IRS will receive a copy automatically. Cross-referencing your tax return against exchange records will be instantaneous.

This creates what tax professionals are calling a “tidal wave” of crypto audit exposure. Everyone who didnt report properly in past years now faces a situation were the IRS has both historical data from John Doe summonses AND real-time data from Form 1099-DA. The past and future combine to create comprehensive exposure.

The Form 1040 Trap

Every tax return since 2019 includes a question about digital assets. You must answer it. And your answer creates legal exposure.

The question appears on Form 1040 (and Form 1040-SR, 1040-NR, 1041, 1065, 1120, and 1120S). It asks wheather at any time during the tax year you received, sold, sent, exchanged, or otherwise acquired any financial interest in any digital currency. You must check either “Yes” or “No.”

Heres the paradox: if you answer “No” when you should have answered “Yes,” youve made a false statement on a federal tax return. This happens BEFORE the IRS even looks at your crypto transactions. The form itself creates the crime.

Making a false statement on a tax return is a separate offense under 26 USC § 7206. Its punishable by up to three years in prison per return. If you filed five returns with false “No” answers, thats potentially fifteen years of exposure – and you havent even gotten to the underlying tax evasion charges yet.

This is why Todd Spodek tells clients that every past return matters. You cant just fix this going forward. If you answered “No” incorrectly on multiple returns, each one is a potential charge. The solution requires addressing the past, not just the future.

How They Prove Willfulness in Crypto Cases

For the IRS to pursue criminal charges, they need to prove willfulness – that you knew you owed taxes and intentionally didnt pay. In cryptocurrency cases, they have multiple ways to establish this.

The Mixer Evidence

Some people use cryptocurrency mixers or tumblers thinking they hide transactions. The IRS specifically looks for mixer usage as evidence of willfulness. If you went out of your way to obscure your transactions, that proves you knew there was something to hide. The tool you used for “privacy” becomes proof you knew you owed taxes.

The Cost Basis Problem

When calculating crypto gains, your cost basis matters. Some people inflate their cost basis to reduce taxable gains – claiming they bought Bitcoin at $15,000 when they actually bought at $10,000. The blockchain shows exactly what you paid. When the IRS reconstructs your actual cost basis from public data, the difference between what you claimed and what actually happened becomes evidence of fraud.

The Professional Background

If your a software developer, tech professional, or anyone who clearly understands how cryptocurrency works, the IRS will argue you understood the tax implications. Claiming ignorance is harder when your background suggests expertise.

Operation Hidden Treasure

The IRS created a specialized initiative called Operation Hidden Treasure. It combines the civil and criminal divisions of the IRS specifically to investigate crypto tax fraud. The civil side identifies discrepancies. The criminal side prosecutes. What starts as a routine civil audit can transform into a criminal investigation without warning.

The conviction rate in crypto tax cases is approximately 90%. The IRS dosent bring cases they cant win. If your charged, your almost certainly going to prison.

The DeFi Complication

Decentralized finance makes everything worse. When you use platforms like Uniswap, Aave, or Compound, your creating taxable events that have no centralized reporting. Liquidity pool transactions, yield farming, and governance token rewards all create tax obligations. But unlike Coinbase, theres no exchange filing paperwork.

The IRS knows DeFi exists. They know people are using it. And they have blockchain analytics tools that can follow transactions into and out of DeFi protocols. The lack of centralized reporting dosent mean anonymity – it means YOU are responsible for tracking and reporting everything. Most people havent done that.

DeFi users often have the most complex exposure because they have hundreds or thousands of micro-transactions, each creating tax events that they never documented. Reconstructing years of DeFi activity is expensive and time-consuming. But the alternative – ignoring it and hoping the IRS dosent figure it out – is worse.

What Frank Ahlgren Teaches You

In 2024, Frank Richard Ahlgren III became the first person convicted of tax evasion solely for cryptocurrency-related violations. His case is instructive because it shows exactly what the IRS is now prosecuting.

Ahlgren sold approximately $4 million worth of Bitcoin between 2017 and 2019. He didnt report the gains. He used various techniques to obscure his transactions. The IRS caught him anyway.

He received a two-year federal prison sentence and was ordered to pay over $1 million in restitution. His case was described as the first “pure tax” crypto prosecution – meaning the only issue was tax evasion, not underlying fraud or other crimes.

Heres what Ahlgrens case tells you: the IRS is done with warning letters. Theyre now actively prosecuting people whose only crime was not reporting crypto gains. You dont need to be running a scam. You dont need to be laundering money. Simply not reporting your trades is enough for federal prison.

And Ahlgren isnt alone. In March 2025, the ex-girlfriend of a cryptocurrency fraudster agreed to plead guilty for failing to report $2.6 million in crypto gains. The pattern is clear: the IRS is building cases, and theyre winning them.

The early adopters are particularly exposed. People who got into crypto before 2017, who saw massive gains during the bull runs, who probably didnt report because they thought it was anonymous – theyre exactly who the IRS is targeting. The gains were huge. The exposure is real. And the statute of limitations for tax fraud is six years. That means trades from 2019 are still within the prosecution window. For unfiled returns, theres no time limit at all.

The 2025 Reporting Tsunami

The Form 1099-DA requirement that begins in 2025 fundamentally changes crypto tax enforcement.

Previously, the IRS had to actively investigate to find unreported crypto. They had to issue John Doe summonses, match records manually, and build cases individually. Starting in 2025, they receive 1099-DA forms automatically. Every exchange, every broker, every payment platform that processes crypto will file reports directly with the IRS.

This creates automatic cross-referencing. The IRS computer matches 1099-DA data against filed returns. Discrepancies trigger notices. Patterns trigger audits. Human investigation isnt required for the initial identification.

But heres the part that really matters: the IRS already has your pre-2025 data from John Doe summonses. The 1099-DA system dosent just create future exposure – it creates a comprehensive view of your entire crypto history. Past trades from 2017 can be matched against current holdings. Unexplained gains from previous years become obvious.

Tax professionals are calling this a “tidal wave” of enforcement. Investors who received Form 1099-DA but havent reported crypto in past years will be prime audit targets. The IRS will know what you traded. They’ll know what you reported. The gaps will be automatic.

This is why 2024 may be your last chance to fix the problem voluntarily. Once the 1099-DA system is fully operational, the IRS will have comprehensive data. Voluntary disclosure becomes harder to claim when the IRS already has all the information.

The Numbers That Should Terrify You

Lets put the enforcement numbers in perspective:

• 390 crypto-related cases investigated by IRS Criminal Investigation (2018-2023)
• $3.5 billion in crypto seizures in fiscal year 2021 (93% of ALL IRS seizures that year)
• $235 million collected in unpaid crypto taxes in 2024 alone
• 33% increase in global crypto tax evasion fines in 2024
• 13,000 customer records turned over from Coinbase alone
• $92 million in assessments just from Coinbase warning letters

The IRS isnt treating cryptocurrency as a side project. Its a primary enforcement focus. The resources they’ve dedicated, the technology they’ve acquired, and the cases they’ve built all point to sustained, aggressive prosecution of unreported crypto gains.

And those 390 investigated cases? Thats just the ones that reached the Criminal Investigation level. Thousands more are being handled civily – audits, penalties, assessments. If your in the civil pile, you might lose money. If your in the criminal pile, you lose years.

What To Do Now

If you have unreported cryptocurrency on past tax returns, you have options – but only if you act before the IRS acts first.

Voluntary Disclosure

The IRS offers a voluntary disclosure program through Form 14457. If you come forward BEFORE the IRS identifies you, you can disclose unreported income, pay the back taxes and penalties, and generally avoid criminal prosecution. The key word is “before.” Once the IRS has you on their radar, voluntary disclosure may not be available.

Amended Returns

If your situation is less severe – you forgot to report some transactions but didnt actively hide anything – amending past returns may be sufficient. This is a civil fix, not a criminal defense strategy. It works for honest mistakes, not willful evasion.

Criminal Defense Preparation

If you’ve already received a letter from the IRS, or if IRS agents have contacted you, voluntary disclosure is probably off the table. You need criminal defense representation immediately. Anything you say can be used against you. The time for fixing the problem yourself has passed.

The signs that you need criminal defense rather than voluntary disclosure include: receiving a letter from IRS Criminal Investigation (not just a civil audit letter), being contacted by IRS Special Agents (they’ll identify themselves), learning that someone connected to your crypto activities is being investigated, receiving a grand jury subpoena, or having your accounts frozen unexpectedly.

If any of these things have happened, do NOT talk to the IRS without an attorney present. Do NOT try to explain yourself. Do NOT destroy records (that creates additional charges). Call a criminal defense attorney immediately.

The cascade from exchange data to prison works like this: Exchange has your records. IRS gets records through summons. Algorithm identifies discrepancy between what exchange reported and what you reported. Civil audit begins. Discrepancy confirms evasion. Case referred to Criminal Investigation. Special Agents investigate. Indictment follows. Conviction rate is 90%. Prison. And you STILL owe all the taxes plus penalties.

Spodek Law Group is located in the Woolworth Building at 233 Broadway in Manhattan. We handle cryptocurrency tax cases nationwide. If you have unreported crypto gains – whether its $50,000 or $5 million – the analysis is the same. You need to understand your exposure. You need to know your options. And you need to act before the IRS acts first.

Call us at 212-300-5196. Todd Spodek has helped clients navigate voluntary disclosure, defend against criminal charges, and minimize exposure in cryptocurrency tax cases. The blockchain dosent forget. Neither does the IRS. But you still have a window to address this on your terms.

The worst thing you can do is nothing. The IRS is building cases right now. The Form 1099-DA system goes live in 2025. Every day you wait, the odds shift further against you.

Remember: the blockchain dosent delete transactions. The IRS dosent forget about unpaid taxes. The statute of limitations for tax fraud is six years. And for unfiled returns, theres no time limit at all. What you did in 2019, 2020, 2021 – all of it is still within reach.

The difference between someone who fixes this proactively and someone who waits for the IRS to find them is often the difference between civil penalties and federal prison. Make the smart choice. Call us today.