David Klasing, a California tax attorney, recalls meeting a client whose initial cryptocurrency holdings had grown to $700 million in eight years and, having never declared a single cent of it, was losing sleep and would be imprisoned for tax evasion.
Klasing says he recommended the client pursue voluntary disclosure, a penalty reduction program for taxpayers who deliberately fail to report their foreign assets. By coming forward proactively, they would avoid criminal prosecution.
“This is the solution for anyone who has large amounts of undeclared cryptocurrencies,” Klasing said in an interview. “I have people coming to me daily who are learning about the new reporting requirements that the government is trying to put in place for foreign exchange, and who haven’t reported anything in ages.”
There is no doubt that if you have accumulated large undeclared gains on cryptocurrencies held abroad, tax authorities in the United States, Europe and many other jurisdictions are now on your trail. The Crypto Asset Reporting Framework (CARF), which came into force in various jurisdictions this month, was designed to align global reporting standards and, essentially, requires foreign brokerages and exchanges to open their kimonos to tax authorities.
“I expect to see a lot of countries take a cue from CARF to establish their own national reporting requirements,” said Colby Mangels, head of government solutions at crypto tax compliance company Taxbit, “We’ll also see a lot more people learning 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 taxman is coming
It had already happened that American taxpayers holding cryptocurrencies 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 over $100,000.
Of course, crypto was designed to stay out of sight of governments, which meant it took a while – Bitcoin first appeared in 2009 – to allow tax authorities to tackle the asset class, not to mention the global patchwork of exchanges and trading platforms. But it’s a process that has progressed steadily, Klasing said, dating back to when the IRS challenged Swiss banking secrecy in the mid-2000s.
At the time, the agency assigned John Doe to Swiss wealth management powerhouse UBS to obtain the names of U.S. taxpayers with undeclared accounts between 2002 and 2007. It is possible to see similarities between numbered bank accounts and the alphanumeric keys controlling cryptocurrencies, with the obvious exception that anyone can receive the latter.
“Money in a suitcase”
While crypto exchanges and brokerages are now being asked to provide account information to authorities in a way that doesn’t harm investors, Klasing says he’s encountering people who are 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 is untraceable. Many of them use mixers and do everything they can to not report the cryptocurrency,” Klasing said.
Taxbit’s Mangels remembers working on the first version of the U.S. Foreign Account Common Tax Rules Reporting Standard (FATCA CRS), which was activated in 2010 and focused on “old-fashioned money laundering and tax evasion,” he said.
“The original setting is from the days of putting your money in a suitcase, getting on a plane to a foreign country and opening a bank account there,” Mangels said in an interview. “Today, I can use my laptop to transact crypto from my living room, using platforms located anywhere in the world, which represents a huge risk for governments.”
Mangels then joined the Organization for Economic Co-operation and Development (OECD) in Paris where he became one of the principal architects of CARF.
Similar to 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, customer 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 companies like Chainalysis, Elliptic, TRM, and Crystal can track and trace wallet transactions on-chain, the trail gets darker when transactions take place within a crypto exchange or other private trading platform, where the vast majority occur, Mangels pointed out.
The new rules provide authorities with the insight they need. Tax auditors and law enforcement will have access to a triple combination of information, including fiat input and output data, on-chain analysis of wallets on public blockchains, and previously unpublished CARF ledger data from internal exchanges.
Wallet Tracking, Tax ID Numbers, Subpoenas
“This is going to trigger a lot of investigations and a lot of interest from governments who wanted this data and find it to be very complementary to on-chain analytics,” Mangels said. “Let’s say the government obtains CARF data and realizes that someone failed to report certain taxes, it will then subpoena the crypto asset service provider that it identified as having the relevant information.”
More than 70 countries have now committed to CARF, and more than 50 have seen legislation come into force in early 2026, Mangels said. This means that many crypto companies will start collecting self-certification information about their customers, such as their tax identification number and tax residency.
Transactions will be monitored during 2026, and the first reporting phase will take place in 2027, when each tax authority will have gathered the necessary information from its exchange partners.
As for Klasing’s client, since he was willing to surrender, the conditions he faces, which include six years of amended returns, penalties and interest, might seem a bit egregious, Klasing said. But they are being given a free pass for something that almost amounts to money laundering, he added.
“It’s the only crime in America where it can be a completed crime and if you handle it correctly, you are absolved of your sins and you don’t go to prison,” Klasing said. “Why? Because you are voluntarily solving the problem.”
