Crypto Tax Rules are Punishing Investors

Justin Zanardi is a CPA and Product & Go-To-Market Lead at Summ who transitioned from financial statement auditing at EY into the crypto industry. He is focused on bridging the gap between crypto and professional services to help build the infrastructure and support needed for mainstream blockchain adoption.

Crypto regulation is finally taking shape in 2026, but instead of bringing the expected clarity, it's exposing some flaws in the system that need to be addressed. This past tax season, investors received their first 1099-DA forms from the IRS, and since then, the responsibility for crypto tax compliance has been shifted onto everyday users. They aren’t prepared to handle it. The IRS was warned this would happen, now it needs to fix the problem.

New Rules vs. Reality

Smart rules build compliance into the system from the start. But when it comes to crypto, policymakers layer compliance on after the fact and retroactively impose it on users. The result has been segmented data and inconsistent reporting. All the risk and burden of those design flaws are placed right on the average consumer, who is exposed to government audits and penalties. For example, recent IRS guidance allowed investors to diverge from their exchange's records for 2025 and 2026. However, due to the tax code's consistency requirement, once a user makes that switch, they can't revert back. This created a permanent fork in investors' tax books, with no clear path to resolve it. Policymakers want results, but they need to close the gaps between what they want and what is actually possible.

Crypto is Fragmented

Crypto activity is spread across wallets, exchanges, and protocols, and these platforms still lack full transparency. It’s a disconnected system with no coherent data standard. Investors are left to do the majority of the work, putting together their transaction histories, flagging inconsistent data, and estimating across platforms. They are also forced to make judgment calls when data is missing or ambiguous, which is inconvenient but also carries real legal consequences if things do not match up.

Recent research from Censuswide found that 52% of U.S. crypto investors are worried about filing their crypto taxes incorrectly. This is not surprising and reflects the anxiety and confusion that I often see around crypto tax compliance.

Financial systems across the board cannot function without consistent, up-to-date recordkeeping. And even now, many crypto tax platforms still have massive gaps that do not give users a full picture of their crypto transactions across platforms.

The vast amount of reporting really puts this into perspective. Kraken recently shared that it issued 56 million tax forms to the IRS this season, but a huge chunk of those were tied to small transactions. About a third (18.5 million) were for less than $1, more than half were for $10 or less, and three out of four were under $50.

This kind of reporting makes sense if it were for seasoned traders making substantial gains, but that is not the case here. Many of these transactions are just fractions of a cent, yet each one still has to generate a tax form. For the average person, this means sorting through piles of paperwork for every little transaction, something I have seen firsthand.

A Power Imbalance at Play

There are real risks of misreporting, and in my experience, it is rarely due to negligence but rather because of incomplete or inconsistent data. There is also a clear power dynamic in play here where institutions can delay compliance timelines, seek exemptions, or lobby for new rules. People do not have those options.

In fact, the IRS is already allowing some brokers to submit documentation up to a full year late without penalties. They do not have to issue 1099-DA forms for 2025 transactions until February 2027. This places investors in a position where they are still expected to file accurately and on time, even if the forms they need are incomplete or unavailable, a situation they did not create and do not have any control over.

The IRS is now allowing taxpayers to request an extension until October of this year, but this simply extends the filing deadline, not the payment deadline, which has already passed.

This is a problem that needs fixing fast. As a CPA in this space, I can tell you that the crypto tax gap will only worsen. AI-driven trading and automation will create an environment where investors will have more activity across more platforms than ever before. Paired with recent crypto market instability, investor activity is likely to increase as they try to capture gains and manage risk, resulting in more reporting and an added level of complexity come tax time.

Beyond the crypto tax gap, there is a very real human cost to all of this. Filing taxes correctly can require a crypto-savvy CPA or tax professional, and this expertise does not come cheap. For many average investors, those fees are simply out of reach. This hits hardest among an active crypto demographic: young people early in their careers, who are least equipped to deal with the challenges of tax compliance.

What Needs to Change

The solution to this problem is not more reporting requirements; it's better infrastructure that can keep up. What crypto users really need right now is real-time tax data with a full overview of their activity that leaves no gaps.

At the same time, crypto is inherently borderless, and platforms operate globally, so there needs to be cross-border cooperation on rules and regulations. I would like to see the industry set standards for transferring cost basis between exchanges, so that investors can move their assets without losing crucial tax information.

I also think that the IRS should make self-reporting relief permanent, accompanied by a safe harbor that protects investors who are trying in good faith to accurately report their crypto. Taxpayers who are genuinely trying to comply should not face consequences for data gaps that are largely outside of their control.

An exemption for small crypto transactions would also be helpful. Making users report every transaction for things like a cup of coffee or a small payment to a friend creates an excessive burden that ultimately discourages everyday adoption and disproportionately disadvantages those with limited resources.

Regulators and industry need to solve these problems together and rebalance the responsibility, not outsource them to users. The “crypto tax gap,” at its core, is a data issue, not a compliance or a tax problem. Until that is fixed, investors will be stuck in the middle. And if crypto is going to mature, I firmly believe that compliance has to be a feature from the start, and not an afterthought.

The opinions shared in this article are the author’s own and do not reflect the views of any organization they are affiliated with.

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