David Klasing, a tax attorney from California, recalls a client whose early cryptocurrency holdings grew to $700 million in eight years but never reported a dime. He lost sleep because they would go to jail for tax fraud.
Krasin said he advises clients to complete voluntary disclosures, a penalty reduction program for taxpayers who knowingly fail to report foreign assets. By coming forward, they will avoid criminal prosecution.
“This is a solution for anyone who has a lot of unreported cryptocurrency,” Krasin said in an interview. “I have people come to me every day who are reading about the new reporting requirements that the government is trying to impose on FX trading, but they are not reporting anything that goes back so long.”
There is no doubt that if you have accumulated significant unreported gains on cryptocurrencies held offshore, tax authorities in the United States, Europe, and many other jurisdictions are now coming after you. The Crypto Asset Reporting Framework (CARF), which began implementation across jurisdictions this month, aims to harmonize global reporting standards, essentially forcing foreign brokerage firms and exchanges to open their kimonos to tax authorities.
Colby Mangels, director of government solutions at cryptocurrency tax compliance company Taxbit, said: “I expect many countries will use CARF as an inspiration to develop their own domestic reporting requirements. We will also see more people educate themselves on cryptocurrency tax compliance. Because if you don’t report, the authorities will find out what happened and the situation will be worse.”
The taxman is coming
There is already a situation where U.S. taxpayers who own cryptocurrencies in foreign accounts must report their holdings of cryptocurrencies above a certain threshold to the IRS. Foreign Bank Account Reporting (FBAR) requirements apply to accounts over $10,000, while foreign account holdings in amounts over $50,000 to $100,000 must complete a Foreign Account Tax Compliance Act (FATCA) form.
Of course, cryptocurrencies are designed to stay out of the sight of governments, which means it will take some time – Bitcoin First appearing in 2009, it allows tax authorities to get a handle on asset classes, not to mention exchanges and trading platforms around the world. But Krasin said the process has been advancing steadily, dating back to the mid-1990s when the IRS challenged Swiss bank secrecy laws.
At the time, the agency issued a John Doe subpoena to Swiss wealth management giant UBS Group AG, seeking the names of U.S. taxpayers who had undeclared accounts between 2002 and 2007. There may be similarities between numbered bank accounts and the alphanumeric keys that control cryptocurrencies, with the notable exception that anyone can obtain the latter.
“Money in a suitcase”
While cryptocurrency exchanges and brokerage firms are now required to provide account information to authorities in a way that does not harm investors, Krasin said he has encountered people using technologies such as decentralized finance (DeFi) to cover their tracks.
“They think it’s harder for governments to trace the paper trail behind DeFi, or it’s impossible to trace it. A lot of them are using mixers and doing everything they can to not report cryptocurrencies,” Klasing said.
Taxbit’s Mangels remembers being involved in developing an early version of the U.S. Foreign Account Tax Rules Common Reporting Standard (FATCA CRS), which was launched in 2010 and focused on “old-school money laundering and tax evasion,” he said.
“The original framework started from the days when you had to put money in a suitcase and get on a plane to some foreign country and open a bank account there,” Mangels said in an interview. “Today, I can trade cryptocurrencies from my living room using my laptop using a platform located anywhere in the world, and that’s a huge risk for governments.”
Mangels subsequently joined the Organization for Economic Co-operation and Development (OECD) in Paris and became one of the key architects of CARF.
Like anti-money laundering (AML) procedures and standards for cryptocurrencies, CARF requires cryptocurrency service providers such as exchanges and wallet providers to collect private and sensitive information about their customers. In this case, the customer’s transactions are reported to the local tax authority, which then shares the information with the customer’s country of residence, just as they would with traditional bank account data.
Mangels noted that while advanced blockchain analytics companies such as Chainaanalysis, Elliptic, TRM, and Crystal can track and trace on-chain wallet transactions, the trail gets darker when transactions occur on cryptocurrency exchanges or other private trading platforms (where the vast majority of transactions occur).
The new rules give authorities the clues they need. Tax examiners and law enforcement will have a triple combination of information, including data on the entry and exit of fiat currency, on-chain analysis of wallets on public blockchains, and ledger data from internal exchanges that CARF has never seen before.
Wallet tracking, tax ID, subpoenas
“This will trigger a lot of investigation and a lot of interest from governments who want this data and find it very complementary to on-chain analytics,” Mangels said. “Suppose the government obtains some CARF data and realizes someone has failed to file some taxes, and then they subpoena the crypto asset service provider that they determine holds the relevant information.”
Mangels said that more than 70 countries have now committed to CARF, with more than 50 of them expecting the legislation to take effect in early 2026. This means that many cryptocurrency companies will start collecting self-certifying information from their customers, such as tax ID numbers and tax residence.
Transactions will be tracked during 2026, with the first round of reporting taking place in 2027, when each tax authority will collect the necessary information from its exchange partners.
As for Krasin’s clients, the terms they face, including six years of modified returns, penalties and interest, may seem excessive as they prepare to turn themselves in, Krasin said. But he added that they were given a pass that was almost akin to money laundering.
“This is the only crime in America where you can get the crime done, and if it’s done right, you get a pardon for your sins and you don’t go to jail,” Krasin said. “Why? Because you voluntarily solve the problem.”
