Tax Talk Thursday: Crypto Enforcement Trends and Foreign Exchange Reporting

Cryptocurrency and foreign exchange icons with tax documents — MKHS Tax Group blog on crypto enforcement and foreign reporting

If you hold cryptocurrency — especially on a foreign exchange — 2026 is the year the IRS's visibility into your activity changed dramatically. Between new broker reporting rules and an evolving stance on foreign account disclosures, the assumptions many crypto holders have relied on for years no longer hold up. Here's what's actually changed, and what it means for your reporting obligations.

Form 1099-DA: The Biggest Shift in Crypto Tax Enforcement to Date

For the 2025 tax year (filed in 2026), covered US digital asset brokers, including most centralized exchanges, are required to report crypto sales to the IRS using the new Form 1099-DA. This is a fundamental change from prior years, when exchanges send information about transactions to both the taxpayer and the government at the same time — a notable shift from previous years, when details were inconsistent.

In practical terms, the IRS now receives a direct copy of your reported crypto proceeds, the same way it has long received W-2s and 1099-Bs for stock sales. Because the IRS receives standardized transaction data directly from brokers, it can use automated matching systems to identify discrepancies between reported information and taxpayer filings, meaning inconsistencies, omissions, or mischaracterizations of crypto activity are more likely to trigger inquiries, notices, or audits.

The Cost Basis Gap — Where Most Mistakes Will Happen

This first filing season comes with a significant catch. Covered assets are cryptocurrencies purchased inside a centralized exchange on or after January 1, 2026, and only for those will exchanges report cost basis going forward. For anything purchased earlier, transferred between exchanges, or moved in from a self-custodial wallet, non-covered assets include any cryptocurrency purchased before January 1, 2026 at any exchange, any cryptocurrency transferred into an exchange from a self-custodial wallet, and any cryptocurrency transferred into an exchange from another exchange — meaning the cost basis box will often be blank.

That gap creates real risk. If a taxpayer simply accepts the broker's reported numbers without reconciling their own records, they may end up overpaying taxes on the full sale price rather than just the capital gain — or, just as commonly, understating gains and triggering an automated mismatch notice. The safest approach is to treat the 1099-DA as a starting point, not a finished answer, and reconcile it against your own transaction history before filing.

A New Wrinkle: Per-Wallet Cost Basis Tracking

The IRS also eliminated a method many crypto holders relied on for simplicity. The IRS has eliminated the universal method, which allowed taxpayers to treat the same asset across multiple wallets as one combined pool. Under the current rules, taxpayers are now expected to maintain cost basis records on a per-wallet or per-account basis, rather than treating everything as one combined pool. If you've moved crypto between exchanges or wallets over the years, this makes accurate basis tracking considerably more labor-intensive — and considerably more important to get right before the IRS's own data starts surfacing discrepancies.

Foreign Crypto Exchanges and FBAR: Where the Rules Stand Today

This is the part most crypto holders get wrong, because the rule has been unsettled for years and is actively moving. As of now, cryptocurrency held on foreign exchanges is not currently required to be reported on the FBAR, a position that traces back to FinCEN Notice 2020-2, which stated that virtual currency is not currently reportable on the FBAR under the existing definition of a reportable account at a foreign financial institution.

But that exemption is not something to lean on long-term. FinCEN has proposed expanding the FBAR definition to include virtual currency accounts at foreign financial institutions, and while the proposed rule is still pending finalization and the timeline is uncertain, the direction of travel is clear. Critically, when finalized, the rule is likely to apply to future filings at minimum, and possibly retroactively — which is exactly the kind of uncertainty that argues for getting ahead of it now rather than waiting for a final rule.

The Important Exception: Hybrid Accounts

One nuance trips up a lot of taxpayers. The pure-crypto FBAR exemption only applies to accounts holding virtual currency alone. If the foreign account holding cryptocurrency is hybrid — meaning it also holds some other currency, like Euros, or other reportable assets — the account could be reportable. In other words, if your foreign exchange account holds both crypto and a fiat cash balance, you may already have an FBAR obligation today, regardless of how the crypto-specific rules eventually shake out.

FATCA: A Broader Net Than FBAR

Separate from FBAR, FATCA reporting on Form 8938 covers a wider range of assets and applies at different thresholds. Unlike the FBAR, the FATCA reporting requirements threshold starts at $50,000 of foreign financial assets and increases depending on the physical presence of the taxpayer and their filing status. The IRS hasn't issued definitive guidance on whether crypto specifically counts as a "specified foreign financial asset" for FATCA purposes, but most practitioners recommend treating it as if it does, since there's no drawback to filing just in case and many taxpayers are choosing to adhere to the FATCA requirement for digital assets in case later guidance requires crypto holders to file the 8938.

What This Means for Crypto Holders Right Now

Put together, the current environment looks like this:

• Domestic exchange activity is now reported directly to the IRS via Form 1099-DA, and automated matching makes discrepancies far more likely to surface than in prior years

• Cost basis for older or transferred holdings often won't appear on your 1099-DA, so independent reconciliation is essential before filing

• Foreign crypto-only accounts aren't yet FBAR-reportable, but the rule is actively changing and may eventually apply retroactively

• Foreign accounts holding crypto alongside cash or other reportable assets may already trigger FBAR today

• FATCA disclosure for crypto held abroad is the more conservative position to take, given the lack of definitive guidance

This is the first year the IRS has direct visibility into broker-reported crypto activity at scale, and the gap between what gets reported automatically and what you're actually responsible for tracking yourself has never been wider. If you hold crypto on a foreign exchange, now is the time to get clarity on whether your account is reportable today — not wait for FinCEN's pending rule to make that decision for you.

If you have crypto activity, foreign exchange holdings, or both, let's review your reporting position together before extension deadlines approach. Reach out to us at info@mkhstaxgroup.com.