Last Updated on January 20, 2026 by Patrick Camuso, CPA
The First Wave of 1099-DA Enforcement Will Operate Through Information-Return Matching
For most digital-asset investors, enforcement under Form 1099-DA will not begin with an audit notice, an agent visit, or a summons. It will begin quietly and mechanically, through an automated crypto tax notice.
The first wave of 1099-DA enforcement will operate primarily through information-return matching, not investigative examination. The IRS is leading with standardized proceeds data and automated discrepancy detection. The earliest enforcement touchpoint will be correspondence.
Camuso CPA has been reconstructing digital asset histories and advising on complex crypto tax positions since long before 1099-DA existed. Our advisory practice integrates statutory guidance with deep technical insight into how digital asset transactions behave across wallets, exchanges, and on-chain environments. We help clients transition from fragmented or incomplete records to fully documented, defensible, and audit-ready tax positions under the new reporting regime.
This article explains how 1099-DA enforcement actually unfolds, why tax notices are the primary risk vector in the first wave, and what sophisticated investors should do before those notices arrive. This article is the playbook for investors that need to survivie the first wave of 1099-DA tax notices.
The IRS Digital Asset Enforcement Ladder
Audits are not the IRS’s default enforcement mechanism. They are the final escalation point in a layered, process-driven enforcement framework designed to resolve discrepancies long before an examination ever begins.
In practice, enforcement under Form 1099-DA follows a predictable sequence:
- Information return ingestion: Broker-filed Forms 1099-DA are ingested into the IRS’s information-return intake and analytics systems.
- Automated discrepancy analysis: Reported gross proceeds are algorithmically matched against Forms 8949, Schedule D, prior-year filings, and related third-party data.
- CP2000 underreporting notices: When mismatches persist, the Automated Underreporter (AUR) program issues CP2000 notices proposing tax adjustments based on the discrepancy.
- Correspondence examinations: If a CP2000 response fails to resolve the issue, the IRS may request additional documentation to substantiate reporting positions.
- Desk or field audits: Formal examinations are reserved for cases involving unresolved discrepancies, material dollar exposure, or credibility concerns.
Most taxpayers never progress beyond the CP2000 stage. That is where the majority of enforcement activity is resolved or escalated. As a result, the first wave of 1099-DA enforcement will be experienced primarily through automated tax notices driven by information-return matching, not through audits.
Why 1099-DA Changes the First Step of Enforcement
Form 1099-DA does not introduce new taxes. It introduces standardized third-party proceeds data at scale.
Historically, crypto enforcement relied on a fragmented mix of voluntary reporting, platform-specific subpoenas, and blockchain analytics without consistent reporting anchors. That model limited automation.
Beginning with 2025 transactions, brokers will generally transmit gross proceeds data for digital-asset dispositions, even when cost basis is unavailable, incomplete, or legally non-reportable. That data provides the IRS with a consistent reference point for matching.
Cost basis is not required to initiate enforcement. Proceeds alone are sufficient to:
- Trigger information-return matching
- Initiate AUR workflows
- Generate CP2000 notices
Missing basis does not delay enforcement. It shifts the burden of explanation to the taxpayer.
What a 1099-DA Tax Notice Will Actually Look Like
A CP2000 notice is not an audit. It is a proposed adjustment generated when IRS systems detect a mismatch between third-party information returns and amounts reported on the return.
In a 1099-DA context, a notice will typically:
- Reference broker-reported gross proceeds
- Proceed as if basis were zero or insufficient for purposes of the proposed adjustment
- Propose additional tax, penalties, and interest
- Provide a short response window, often 30 days
The notice will not explain why basis is missing. It will simply present a reconciliation problem, proceeds were reported; corresponding gain was not substantiated.
The Most Common Investor Mistakes After Receiving a Notice
The notice itself is rarely the greatest risk. The response is.
Common mistakes include:
- Ignoring the notice, assuming it will self-correct
- Waiting for brokers to “fix” missing basis despite statutory limits
- Submitting raw CSVs without reconciliation or explanation
- Refiling returns without addressing the underlying mismatch
- Conceding tax prematurely to “make it go away”
These responses often escalate exposure by signaling confusion, inconsistency, or lack of substantiation.
How the IRS Interprets Silence, Delay, and Poor Responses
In correspondence-based enforcement, outcomes are driven as much by process discipline as by underlying tax positions.
From the IRS’s perspective:
Nonresponse is treated procedurally as acceptance of the proposed adjustment. Absent a timely reply, the IRS will assess the proposed tax and advance the case within its enforcement workflow.
Incomplete responses trigger additional requests. Partial explanations or unsupported assertions rarely close the issue and they may invite expanded information demands. Inconsistent explanations erode credibility. Conflicting narratives, shifting methodologies, or unexplained changes between filings signal unreliability and increase scrutiny.
Disorganized documentation expands review scope. Unstructured data dumps and unreconciled records force the IRS to reconstruct the story itself, often to the taxpayer’s detriment.
A CP2000 response is not evaluated on length or data volume. It is evaluated on whether the response resolves the identified discrepancy in a defensible, internally consistent manner supported by contemporaneous records.
Importantly, speed alone is not a virtue. A rapid but imprecise response often produces worse outcomes than a measured submission grounded in disciplined reconciliation and clear explanation.
Why Digital Asset Cost Basis Is Still the Real Issue
Although Form 1099-DA enforcement is triggered by broker-reported proceeds, it is ultimately resolved through cost basis.
In correspondence enforcement, the IRS does not attempt to reconstruct basis on the taxpayer’s behalf. It proceeds as if basis were zero or insufficient unless substantiated otherwise, consistent with IRC §6001 and longstanding recordkeeping doctrine. Broker forms are informational inputs, not authoritative determinations. Tax software outputs are computational tools, not evidence.
Where basis is absent, incomplete, or inconsistent with third-party reporting, the burden shifts entirely to the taxpayer to establish a defensible basis position. That burden cannot be satisfied by broker corrections, CSV uploads, or post-hoc reallocations alone.
This is where Rev. Proc. 2024-28 becomes relevant. The procedure governs how taxpayers must transition away from legacy universal pooling practices and allocate historical basis on a unit- or account-specific basis. For taxpayers who did not complete a safe-harbor transition, basis reconstruction is no longer elective it is the only path to substantiation. We address the mechanics and consequences of that transition in detail in a separate article.
In this environment, missing basis is not merely a reporting inconvenience. It is an enforcement accelerant. Proceeds trigger the notice; basis determines whether the adjustment stands.
What a Proper CP2000 Response Actually Requires
A defensible response to a CP2000 notice hinges on an accurate reconciliation and accounting process.
At its core, the IRS is testing whether broker-reported proceeds were accurately reflected on the return and, if not, whether the taxpayer can substantiate a different result with coherent records and methodology. A proper response therefore focuses on resolving the discrepancy.
In practice, an effective CP2000 response typically includes:
- A reconciled transaction schedule that ties broker-reported proceeds to the dispositions reported on Form 8949 and Schedule D, clearly identifying what was reported, what was adjusted, and why.
- Wallet- or account-level basis allocations demonstrating how cost basis was assigned to specific units or positions, particularly where assets were noncovered, transferred, or held across multiple platforms.
- A clearly articulated lot-selection methodology, such as FIFO or valid Specific Identification, applied consistently and supported by contemporaneous records or standing instructions where applicable.
- Timestamp normalization and alignment, where necessary, to reconcile broker-reported disposition times with taxpayer records and avoid artificial year-of-sale or holding-period discrepancies.
- A concise narrative explanation that directly addresses the mismatch identified in the notice, explains the basis determination, and walks the examiner from proceeds to reported gain or loss without gaps.
What a proper response does not include is a raw data dump. Submitting thousands of unreconciled transactions, exchange exports, or software screenshots without explanation does not satisfy the IRS’s inquiry and often expands it.
The IRS is not asking for a complete trading history. It is asking a narrow question, whether the proceeds it received through third-party reporting were properly accounted for on the return. A successful response answers that question directly, with documentation that is targeted, internally consistent, and defensible under examination standards.
Why “I Used Tax Software” Is Not a Defense
During enforcement, the IRS does not evaluate software outputs in isolation. It evaluates the underlying records, methodology, consistency, and documentation that support the numbers reported on the return. Software simply processes the data it is given; it does not validate historical accuracy, establish custody lineage, or cure missing basis.
If cost basis reconstruction was incomplete, inconsistent, or unsupported, no software-generated report will resolve that defect. Outputs are only as reliable as the inputs and under IRC §6001, the obligation to substantiate those inputs rests with the taxpayer, not the software provider.
In enforcement, methodology matters. Documentation controls. Software is a tool, not a defense.
State Notices and Filing Issues: A Parallel Risk Track
Federal enforcement is only one part of the 1099-DA risk profile. State tax exposure runs on a separate and independent track, with its own filing rules, notice regimes, and penalty structures.
States are expected to use Form 1099-DA data, directly or indirectly, to identify reporting gaps, match digital-asset proceeds to state returns, flag missing or inconsistent filings, evaluate part-year residency claims, and assess penalties and interest. This exposure is not limited to audits; it often begins with filing-compliance notices, information-return inquiries, or underreporting assessments.
When Crypto Tax Notices Turn Into Audits and When They Don’t
Most CP2000 cases resolve at the correspondence level and do not escalate to audit. The IRS’s objective at this stage is reconciliation, not examination. When discrepancies are explained and substantiated coherently, cases are typically closed without further action.
Escalation occurs only when correspondence enforcement fails. This usually happens when cost basis cannot be substantiated, responses are internally inconsistent, material discrepancies remain unresolved, or the taxpayer’s credibility deteriorates through delay, silence, or disorganized submissions. In those cases, what began as an automated mismatch can evolve into a correspondence examination or, in higher-dollar or higher-risk situations, a desk or field audit.
Importantly, audits in the 1099-DA context are rarely triggered by the original data alone. They are more often the result of how a taxpayer responds or fails to respond to earlier notices. Many audits are therefore not inevitable outcomes, but the downstream consequence of avoidable procedural missteps.
The Investor’s Defensive Playbook (Before Notices Arrive)
Once third-party proceeds data enters IRS matching systems, corrective action becomes reactive, constrained, and often costly. The only durable advantage investors retain is preparation performed before automated reconciliation begins.
Sophisticated investors should reconstruct legacy cost basis for pre-2025 activity, with particular attention to assets acquired between 2013 and 2024 that will remain noncovered under §6045(g). Basis should be allocated at the wallet or account level in a manner that is internally consistent under Rev. Proc. 2024-28, traceable, and defensible under audit standards not merely optimized for software output.
Lot-selection methodology must align with reporting reality. FIFO operates as the default absent adequate identification, and any use of Specific Identification should be supported by contemporaneous records and applied consistently within each wallet or account. Timestamp normalization across exchanges, wallets, and on-chain records is also critical to avoid artificial mismatches at year-end and holding-period errors.
Before filing, investors should reconcile expected Form 1099-DA proceeds against independently prepared transaction schedules, identifying and resolving discrepancies in advance. A pre-filing discrepancy review, covering basis substantiation, lot selection, timing alignment, and reporting consistency, does not eliminate enforcement risk, but it materially reduces the likelihood that automated notices escalate into examinations.
Who Is Most Exposed in the First Wave of 1099-DA Related Tax Notices
Early enforcement under Form 1099-DA will not distribute evenly across the digital-asset population. Exposure will concentrate among taxpayers whose activity patterns generate fragmented reporting trails, conditions that information-return matching systems are specifically designed to surface.
The highest-risk profiles include:
- Active traders with frequent transfers, where assets routinely exit and re-enter broker custody, breaking covered-asset continuity and producing reportable proceeds without broker-reportable basis under §6045(g).
- DeFi participants and bridge users, whose activity spans protocols, chains, wrappers, and re-issuance mechanics that fall outside any single broker’s custodial lineage, resulting in structurally noncovered positions.
- Multi-exchange investors, particularly those who consolidated data after the fact but did not maintain contemporaneous wallet- or account-level basis allocation consistent with §6045 architecture.
- High-income filers, whose returns are more likely to be routed through enhanced analytics, cross-year matching, and manual review once discrepancies are identified.
- Taxpayers who failed to reconstruct their cost basis, especially where historical accounting relied on global or universal pooling assumptions, software-driven reallocations, or post-hoc basis reconstruction that cannot be reconciled cleanly to broker-reported proceeds or wallet-level activity.
The unifying risk factor is data discontinuity with activity that spans platforms, custody models, or accounting regimes in ways that prevent third-party reporting from aligning cleanly with the return. Automated enforcement systems do not evaluate sophistication; they evaluate consistency. Where proceeds anchor exists but basis lineage does not, first-wave exposure follows.
Welcome To The Digital Asset Compliance Era
Form 1099-DA is not a completed tax determination. It is a partial ledger. The absence of cost basis reflects the statutory limits on broker basis reporting under IRC §6045(g), not data error, operational failure, or temporary transition friction.
For the first time, the IRS receives standardized, third-party proceeds data for digital-asset dispositions at scale. That data can be systematically matched, reconciled, and escalated across accounts, platforms, wallets, and tax years. It does not need to be comprehensive to be effective. It needs only to be consistent, attributable, and externally verifiable.
This is the defining characteristic of what we refer to at Camuso CPA as the Digital Asset Compliance Era.
In prior phases of crypto taxation, enforcement was constrained by fragmentation. Reporting was voluntary, records were self-curated, and reconciliation depended heavily on taxpayer representations.
Digital-asset reporting is now evaluated through third-party corroboration. Broker filings, historical returns, blockchain analytics, and information-return matching operate as parallel inputs. The taxpayer’s return is no longer the starting point; it is one data point in a broader verification framework.
In this environment, compliance does not turn on intent, good faith, or after-the-fact explanation. It turns on whether reported outcomes are supported by contemporaneous records, defensible accounting methodology, and internal consistency across data sources. Where those elements are absent, enforcement proceeds mechanically, through notices, proposed adjustments, and escalation.
Most taxpayers will encounter it first through correspondence: CP2000 notices, discrepancy letters, and state-level inquiries driven by third-party data. These are not signals of heightened scrutiny or suspicion. They are the predictable output of a system designed to reconcile partial ledgers against taxpayer filings.
Taxpayers who recognize this shift and prepare accordingly, by reconstructing basis, aligning lot-selection methodology, normalizing timestamps, and reconciling reporting across wallets and platforms will retain control over outcomes. Those who continue to rely on informal assumptions, software outputs without substantiation, or the expectation of post-hoc correction will encounter the Digital Asset Compliance Era through enforcement rather than preparation.
This is not a temporary phase. It is a structural change.
The Digital Asset Compliance Era has begun with standardized data, automated matching, and correspondence enforcement. The question is no longer whether digital-asset activity will be visible. It is whether taxpayers will be ready when that visibility is acted upon.
Watch The Investor’s Playbook for Surviving the First Wave of 1099-DA Tax Notices
Frequently Asked Questions About 1099-DA Tax Notices and Enforcement
Why is cost basis missing on my Form 1099-DA?
Cost basis is often missing because the digital asset is treated as noncovered for broker reporting purposes under IRC §6045(g). Assets acquired before 2026 or moved outside continuous broker custody generally cannot have basis reported, even if the taxpayer maintains records.
Does missing cost basis on Form 1099-DA mean the IRS won’t enforce the transaction?
No. Gross proceeds alone are sufficient to initiate IRS information-return matching, automated discrepancy analysis, CP2000 underreporting notices, and audit inquiries. Missing basis shifts the burden of substantiation to the taxpayer rather than preventing enforcement.
Will brokers be able to correct missing cost basis later?
Generally, no. If an asset is noncovered, IRC §6045(g) does not permit broker basis reporting, even if the taxpayer later provides documentation. Amended or corrected Forms 1099-DA cannot reconstruct custody history the broker did not track.
What is the difference between covered and noncovered digital assets?
Covered digital assets are generally those acquired on or after January 1, 2026 and held continuously within the same broker account. Noncovered assets include assets acquired earlier or transferred across wallets, exchanges, or protocols, and typically lack broker-reported basis.
Why do some 1099-DA transactions show gains while others do not?
When dispositions include both covered and noncovered units, brokers may report gain or loss only for the covered portion while reporting gross proceeds for the entire transaction. This can create the appearance of incomplete or inconsistent reporting.
How does Rev. Proc. 2024-28 affect crypto cost basis reporting?
Rev. Proc. 2024-28 outlines how taxpayers transition away from universal pooling practices and allocate historical basis to specific units or accounts. Taxpayers who did not complete a safe-harbor transition must rely on defensible reconstruction methods consistent with the procedure.
Can I wait for all Forms 1099-DA to arrive before filing my return?
Waiting can increase risk. IRS matching and discrepancy analysis do not pause while taxpayers wait for late or corrected Forms 1099-DA. Returns should be filed based on complete internal reconciliation, with later broker data addressed through documentation or amendments if necessary.
How should Form 1099-DA be reported on my tax return?
Taxpayers must report all digital asset dispositions on Form 8949 and Schedule D (or IRS-permitted aggregate formats) using independently determined basis and holding period data. Broker-reported proceeds are reconciled, not adopted as authoritative.
Is FIFO now mandatory for crypto tax reporting?
FIFO operates as the default method absent adequate identification. Specific Identification remains permissible when units are properly identified at or before disposition and the method is applied consistently at the wallet or account level.
Will states use Form 1099-DA data for enforcement?
States are expected to use Form 1099-DA data,directly or indirectly, to match proceeds, identify missing filings, verify residency claims, and assess penalties. For tax year 2025, Form 1099-DA is not included in the Combined Federal/State Filing program under current guidance.
What does the “Digital Asset Compliance Era” mean for crypto investors?
The Digital Asset Compliance Era reflects a shift toward third-party-verified enforcement. Digital asset reporting is now evaluated through standardized proceeds data, cross-platform matching, and documentation review, making defensible records and reconciliation essential to audit-ready compliance.
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About Camuso CPA
Camuso CPA is the category leader in digital asset taxation, Web3 accounting, and crypto compliance strategy. Since 2016, the firm has advised founders, investors, protocols, start-ups and family offices navigating the technical, regulatory, and operational complexities of digital assets.
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