IRS Turns to On-Chain Wallets: 86% of Taxable Crypto Activity Occurs Outside Reporting Frameworks

Written by: Shehan Chandrasekera

Translated by AididiaoJP, Foresight News

Most crypto investors have two mantras in mind. One is: "Once I receive Form 1099-DA, I’ll have a solid basis for filing my taxes." The other is: "If I don’t receive this form, the IRS won’t see it."

Both of these statements are increasingly untenable.

Shehan Chandrasekera, author of Forbes’ Digital Assets column and a crypto tax expert, notes that the crypto activities visible to the IRS significantly exceed the scope covered by Form 1099-DA. Chainalysis’s latest “Crypto Tax Report” puts it more bluntly: in 2025, global on-chain potential taxable crypto activity is projected to reach at least $457 billion; meanwhile, enforcement logic is shifting from “looking at forms” to “looking at wallets.”

Before tax season arrives, it's worth clearly understanding these changes.

The $457 billion estimated by Chainalysis is not the amount of taxes already collected by governments, nor the theoretical tax liability of taxpayers, but rather the scale of "potential taxable activities." It combines three categories of on-chain activities: realized gains from trades, income from mining, staking, lending, and gambling, and payments made in cryptocurrency.

The report covers six major blockchains: Bitcoin, Ethereum, Solana, Tron, BNB Smart Chain, and Base. Activities that do not occur on-chain, such as centralized exchange internal matching, in-platform staking, and in-platform lending, are not included in the statistics. Therefore, $457 billion is more of a lower bound than an upper bound.

By region, North America accounts for approximately $134.6 billion, the European Union for approximately $125.1 billion, and East Asia for approximately $54.7 billion. By country, the United States alone accounts for $112.6 billion, comprising $64.6 billion in payments, $30.1 billion in earnings, and $17.9 billion in revenue. Germany, China, the United Kingdom, and India follow thereafter.

These numbers themselves do not determine who owes how much tax. Instead, they illustrate something else: crypto activities have grown large enough to enter the radar of tax authorities worldwide, while traditional filing forms are far behind the actual scale of on-chain activity.

In the U.S., investors are most familiar with Form 1099-DA. This form corresponds to broker reports from centralized platforms and primarily covers information on digital asset sales completed through regulated brokers.

Internationally, the corresponding framework is the OECD’s Crypto-Asset Reporting Framework (CARF). It requires eligible centralized exchanges, brokers, certain retailers, and wallet service providers to collect customer information and report it to competent tax authorities. Dozens of countries plan to exchange information under CARF starting in 2027.

The issue is coverage.

Chainalysis estimates that only about 14% of on-chain taxable activities in its dataset can be directly captured by frameworks like CARF. The remaining 86% occur on decentralized exchanges, peer-to-peer transfers, on-chain income streams, and crypto payments—activities that typically do not pass through centralized brokers that issue Form 1099-DA and are not necessarily within CARF’s practical scope.

In other words, Form 1099-DA is not a complete picture of crypto taxes—it’s just a snapshot from centralized exchanges.

This is not a clever loophole, but a structural gap reported by third parties: the table only shows the segment involving intermediaries, accounts, and real-name verification. Self-custody wallets, DEXs, cross-chain bridges, DeFi protocols, staking and lending yields, peer-to-peer transfers, and offshore platforms often do not appear on the same table at all.

A gap does not mean it is invisible.

The exchange knows you; the chain knows where the coins are going.

What truly enhances law enforcement capabilities is connecting the two pieces of information.

When a taxpayer withdraws cryptocurrency from a centralized exchange to a personal wallet, the exchange knows who made the withdrawal. Once the coins are on the blockchain, their subsequent movements, splits, exchanges, cross-chain transfers, and entry into any protocol leave public traces. Blockchain analysis aims to link "this person" with "these addresses."

Chainalysis's methodology centers on wallet clustering and attribution analysis: grouping addresses with similar behavioral patterns and frequent fund transfers, then determining who likely controls each group. This enables observation of DEX trades, cross-chain bridge usage, peer-to-peer transfers, and interactions with specific services.

Thus, enforcement can shift from being centered around Form 1099 to being wallet-centric. Activities not listed on a single form do not automatically mean the IRS cannot reconstruct them.

The United States has a similar context. Public reports have indicated that around 2022, the U.S. "crypto tax gap"—the discrepancy between taxes paid on crypto transactions and taxes owed—was approximately $50 billion annually, accounting for about 8% of the overall tax gap that year. Congressional estimates suggest that Form 1099-DA could generate around $28 billion in revenue over ten years. However, like many domestic reforms in other countries, the effectiveness of purely domestic form changes is diminished as long as taxpayers can trade outside their country of residence’s reporting system.

This is why tax authorities are increasingly focusing on on-chain data rather than waiting for the next 1099 form.

Even if the activity appears on Form 1099-DA, the form itself is often insufficient.

The broker may know that you sold an asset, but not necessarily where it was originally purchased, at what price, whether it was transferred back from a self-custody wallet, whether the same asset was swapped on a DEX, whether new tokens were generated during staking, or whether these coins were mixed with those from other sources.

The most common path for crypto assets has always been “buy one place, store one place, sell another.” Moving coins between exchanges, hardware wallets, hot wallets, and cross-chain bridges is the industry norm, not the exception. CARF and 1099-DA are typically not tools for reconstructing entire historical ledgers. Exchanges usually report disposal events, not complete cost bases.

This leads to a common misconception: receiving Form 1099-DA and assuming that simply filling it out is enough. In reality, the missing information on the form is precisely the most critical part for calculating gains and losses.

Chainalysis also emphasizes that even if countries obtain CARF data, they will still face several structural gaps: assets are frequently transferred between different platforms; historically, most coins first enter private wallets; the framework itself is not retrospective; most DEXs are practically difficult to include; peer-to-peer, self-custodied, and offshore platforms with no reporting connection points are excluded; mining rewards, staking income, lending income, and a large volume of goods and services payments are not within the core data collection scope; even when sales are reported, the purchase cost may still not align; and much of the reported data is aggregated, not detailed at the individual transaction level.

For taxpayers, the takeaway is practical: Form 1099-DA is a clue, not a complete ledger.

Put them together, and the meaning isn't complicated.

Crypto taxpayers don’t need a system that says, “Record accounts with statements, and leave those without statements for now”—they need a complete ledger covering all exchanges, all wallets, and all on-chain activities. Every transaction—whether a purchase, a sale, income, or merely a transfer between your own addresses—must be accurately tracked, and cost bases must be properly carried forward.

The risks ahead are no longer abstract. The scope of Form 1099-DA is expanding, and the IRS will obtain increasing amounts of third-party data to cross-reference with taxpayers’ self-reported information. Meanwhile, beyond broker data, blockchain analysis can reconstruct wallet transaction paths. When what you report mismatches the picture that can be reconstructed from “form data + on-chain data,” the risk of an audit shifts from a theoretical possibility to a tangible vulnerability.

Only your own records can match these entries.

This is especially true for those who have already moved assets to self-custody wallets, used DEXs or DeFi protocols, transferred funds between multiple platforms, or engaged with both domestic and international platforms. It’s not because these activities inherently constitute tax evasion, but because they fall outside the scope of Form 1099-DA and are increasingly likely to be captured through wallet-level analysis.

Before tax season, instead of assuming “no form means no one’s looking,” ask yourself a more practical question: Can your records withstand verification against both forms and the blockchain?