Crypto exchanges, especially the largest, most secure ones like Coinbase, do report transaction history to the IRS. They also issue some variation of Form 1099. Due to a matching mechanism in the IRS InformationReporting Program (IRP), not reporting the income you made on these large exchanges will trigger an automatic flag for the IRS, likely prompting further investigation.
Individual transfers for things like peer-to-peer transactions are only tracked if one of the individuals reports them. But they are still taxable events that must be disclosed in your taxes.
In fact, with the addition of the new (as of 2019 tax season) question regarding virtual currencies now found on Form 1040s, and the 10,000 letters sent out by the IRS in 2019 to potential under-reporters, it’s a safe bet the IRS is on the lookout for this kind of crypto tax evasion.
Additionally, a former division chief of the IRS recently wrote the agency is expected to move from “educating” people about crypto tax procedures to enforcement this year. Education is a euphemism that often means, sending a taxpayer a nice letter that says, “You seem to have forgotten to report…so file this form.” Enforcement on the other hand? That’s exactly what it sounds like.
Considering the surge in prices for cryptocurrencies like bitcoin in 2020 and into early 2021, the enforcement actions, fines, and penalties will likely be larger than ever.