David Klasing, a California tax attorney, remembers meeting a client whose early cryptocurrency holdings had grown to $700 million in eight years, and after never reporting a dime of it, they were losing sleep over the prospect of being jailed for tax evasion.
Klasing says he recommended the client complete a voluntary disclosure, a penalty-reduction program for taxpayers who knowingly fail to report foreign assets. By coming forward proactively, they would avoid criminal prosecution.
“It’s the solution for anyone who has large amounts of unreported crypto,” Klasing said in an interview. “I have people coming to me daily who are now reading about new reporting requirements that the government is trying to impose with foreign currencies and who haven’t reported anything in ages.”
There is no doubt that if you have accumulated significant unreported gains on cryptocurrency held off-shore, the tax authorities in the US, Europe and many other jurisdictions are now on the trail. The Crypto Asset Reporting Framework (CARF), which went live in various jurisdictions this month, was designed to align global reporting standards and basically force foreign brokerages and exchanges to open their kimonos to tax authorities.
“I expect to see a lot of countries taking CARF as an inspiration to establish their own domestic reporting requirements,” said Colby Mangels, head of government solutions at crypto tax compliance firm Taxbit, “We’re also going to see a lot more people educating themselves about crypto tax compliance. Because if you don’t report it, the authorities will find out what’s going on and it will be worse.”
The tax man is coming
It was already the case that US taxpayers with cryptocurrency in foreign accounts had to report their holdings to the IRS above certain thresholds. Foreign Bank Account Reporting (FBAR) requirements apply to accounts over $10,000, while a Foreign Account Tax Compliance Act (FATCA) form must be completed for foreign assets ranging between $50,000 and $100,000 plus.
Of course, crypto is designed to stay out of sight of governments, which means it has taken some time – bitcoin first emerged in 2009 – for tax authorities to get a handle on the asset class, not to mention the global patchwork of exchanges and trading platforms. But it’s a process that has steadily evolved, Klasing said, dating all the way back to when the IRS challenged Swiss bank secrecy back in the mid-1900s.
At the time, the agency issued a John Doe subpoena to Swiss wealth management powerhouse UBS for the names of US taxpayers with undeclared accounts between 2002 and 2007. It’s possible to see similarities between numbered bank accounts and cryptocurrency-controlling alphanumeric keys, with the obvious exception that all can be issued.
‘Money in a suitcase’
While crypto exchanges and brokerages are now required to provide authorities with account information in a way that doesn’t harm investors, Klasing says he comes across people using techniques like decentralized finance (DeFi) to cover their tracks.
“They think the paper trail behind DeFi is harder for the government to follow or untraceable. Many of them use mixers and do everything they can to not report cryptocurrency,” Klasing said.
Taxbit’s Mangels recalls working on the early version of the US Foreign Tax Code’s Common Reporting Standard (FATCA CRS), which was activated in 2010 and focused on “old school money laundering and tax evasion,” he said.
“The original framework is from the days when you had to put your money in a suitcase and get on a plane to a foreign country and open a bank account there,” Mangels said in an interview. “Today I can use my laptop to trade crypto from my living room using platforms located anywhere in the world, which is a huge risk for governments.”
Mangels went on to join the Organization for Economic Co-operation and Development (OECD) in Paris, where he became one of CARF’s principal architects.
Like crypto’s anti-money laundering (AML) procedures and standards, CARF requires crypto service providers such as exchanges and wallet providers to collect private and sensitive information about their customers. In this case, customers’ transactions are reported to local tax authorities, who then share the information with customers’ home countries, just as they do with traditional bank account data.
While sophisticated blockchain analytics firms such as Chainalysis, Elliptic, TRM and Crystal can track and trace wallet transactions on-chain, the trail goes dark when transactions take place within a crypto exchange or other private trading platform, which is where the vast majority take place, Mangels pointed out.
The new rules give the authorities the light they need. Tax auditors and law enforcement will be familiar with a triple combination of information, including fiat on- and off-ramp data, onchain analytics of wallets on the public blockchains, and CARF’s unprecedented ledger data from internal exchanges.
Wallet tracking, tax IDs, subpoenas
“It’s going to trigger a lot of research and a lot of interest from governments that have wanted this data and are finding that it’s very complementary to onchain analytics,” Mangels said. “Let’s say the government gets some CARF data and realizes that someone hasn’t declared some taxes, they’ll subpoena the crypto-asset provider that they’ve identified as the holder of the relevant information.”
Over 70 countries have now committed to CARF, and over 50 saw the legislation go live by early 2026, Mangels said. This means that many crypto companies will start collecting self-certification information about their customers, such as their tax ID and tax domicile.
Transactions will be tracked during 2026 and the first reporting will take place in 2027, when each tax authority will have collected the necessary information from its exchange partners.
As for Klasing’s client, the terms they face, which include six years of amended returns, penalties and interest, may seem a little scary, Klasing said as they prepared to turn themselves in. But they get a pass for something that almost looks like money laundering, he added.
“This is the only crime in America where it can be a felony, and if you handle it right, you will be acquitted of your sins and you will not go to jail,” Klasing said. “Why? Because you voluntarily solve the problem.”
