Julia Chirkova
As the Internal Revenue Service (IRS) rolls out its new 1099-DA reporting system, a critical flaw is emerging that could lead millions of American cryptocurrency investors to significantly overstate their capital gains, potentially incurring higher tax liabilities. An in-depth analysis conducted by Summ, a leading crypto tax software provider, reveals that the average crypto investor may be facing an astonishing $14,500 in overstated capital gains due to incomplete cost basis tracking across various trading platforms.
The analysis, which examined data from 30,000 U.S. users with moderate trading activity, points to an alarming discrepancy. For the 2025 tax year alone, these users collectively saw an inflation of capital gains by $435 million, a staggering 944% increase compared to their actual calculated gains of $46 million. This substantial gap is attributed to a fundamental challenge in how digital asset transactions are currently reported: when investors purchase cryptocurrency on one platform and subsequently sell it on another, the crucial cost basis information often fails to transfer.
Shane Brunette, founder and CEO of Summ, articulated the core of the problem in a statement released on March 2. "The Form 1099-DA was designed to bring transparency to crypto taxation, but it’s creating a new problem," Brunette stated. "These forms only capture part of the picture; typically just the sale. Without the purchase history from other platforms, the IRS sees proceeds with zero cost basis, which looks like pure profit on paper." This means that for transactions initiated on platforms that do not report to the IRS, and concluded on platforms that do, the cost of acquisition is effectively rendered invisible to the tax authorities, leading to an erroneous calculation of taxable profit.
The Fragmentation Challenge: A Growing Tax Burden
The Summ analysis highlights how the fragmented nature of the cryptocurrency market directly contributes to these reporting gaps. The digital asset ecosystem is characterized by a multitude of exchanges, decentralized finance (DeFi) protocols, decentralized exchanges (DEXs), and self-custodial wallets, none of which necessarily share transaction data with each other or with traditional financial institutions.
A typical scenario illustrating this issue involves an investor who acquires Bitcoin through a decentralized exchange or a self-custodial wallet – platforms that are not typically required to issue tax forms like the 1099-DA. Later, this investor decides to sell their Bitcoin on a well-known, regulated exchange such as Coinbase or Kraken. These reporting platforms are mandated to issue a 1099-DA form to both the investor and the IRS, detailing the sale. However, since these exchanges have no record of the investor’s original purchase price from the non-reporting platform, they are compelled to report the sale proceeds with a cost basis of zero. From the IRS’s perspective, a sale with a zero cost basis appears as a 100% taxable gain.
Brunette elaborated on this point with a concrete example: "You could have bought that Bitcoin for $50,000 and sold it for $52,000, a $2,000 gain," he explained. "But if the purchase happened off-platform, the 1099-DA makes it look like you gained $52,000. That’s a $50,000 difference you’ll need to explain to the IRS." This illustrates the potentially massive overstatement of gains, which can lead to an unexpectedly high tax bill.
The Burden of Proof: Taxpayers Left to Reconcile
The lack of comprehensive, cross-platform transaction tracking places a significant burden on taxpayers, according to Summ’s findings. Investors are now faced with two primary challenges:
- The Need for Comprehensive Record-Keeping: Taxpayers must meticulously track and aggregate their entire transaction history across every single platform and wallet they have utilized. This includes purchases, sales, trades, and any other disposition of digital assets. The absence of a centralized reporting mechanism means the onus is entirely on the individual to provide complete and accurate documentation.
- The Risk of Inaccurate Reporting: Without this consolidated data, investors risk submitting tax returns that are either inaccurate or incomplete. Relying solely on the information provided in 1099-DA forms, which only capture a fraction of their overall activity, can lead to significant overpayments of taxes or, conversely, unintentional underreporting that could trigger an IRS audit.
The urgency of this situation is amplified by the current timing. With 1099-DA forms beginning to arrive now, investors have a limited window to reconcile potentially years of cross-platform cryptocurrency activity. The complexity of this task is further compounded by the variety of digital asset transactions that are subject to taxation, including but not limited to:
- Wallet-to-Wallet Transfers: Moving assets between self-custodial wallets.
- Non-Fungible Token (NFT) Transactions: Buying and selling digital collectibles.
- Cross-Chain Bridges and Swaps: Interacting with different blockchain networks.
- Cryptocurrency Earned as Income: Receiving rewards, interest, or payments in crypto.
- Staking Rewards: Gains from participating in proof-of-stake networks.
- Airdrops: Receiving free tokens as part of promotional campaigns.
Each of these transaction types can create additional cost basis gaps if not properly accounted for, further complicating the tax reporting process.
Extrapolating the Impact: A Potential Multi-Billion Dollar Discrepancy
The $435 million in overstated gains identified in Summ’s analysis represents only a portion of the potential issue. The study’s methodology focused on a specific transaction pattern: purchases on non-reporting platforms followed by sales on reporting platforms. It did not encompass other common yet complex crypto transactions.
When extrapolated across the estimated 46 million U.S. cryptocurrency investors, the collective impact of these reporting gaps could be astronomical. Summ suggests that the total overstated gains across the nation could potentially exceed $600 billion. While individual impacts will undoubtedly vary significantly based on an investor’s specific trading patterns, frequency, and the platforms they use, this figure underscores the systemic nature of the problem.
The IRS’s initiative to increase reporting through forms like the 1099-DA was intended to improve tax compliance and revenue collection. However, the current implementation, without a robust mechanism for cross-platform cost basis tracking, appears to be creating unintended consequences that disproportionately burden crypto investors.
A Call for Comprehensive Data Aggregation
For cryptocurrency investors navigating this new tax landscape, the message from experts like Summ is unequivocal: do not rely solely on the information provided in 1099-DA forms. These documents offer an incomplete snapshot of an investor’s financial activity within the crypto space.
"Your actual tax liability likely bears no resemblance to what those forms suggest," Brunette emphasized. "The only way to report accurately is to aggregate your complete transaction history across every platform you’ve used." This necessitates a proactive approach from investors, who must actively seek out and consolidate all their transaction records.
Understanding the Data Methodology
Summ’s analysis was based on a random sample of 30,000 U.S. users who demonstrated moderate trading activity, defined as engaging in between 1,000 and 50,000 transactions within the 2025 tax year. The study specifically focused on scenarios where users acquired cryptocurrency on platforms that do not typically issue tax reporting forms to the IRS (non-reporting platforms) and subsequently sold those assets on platforms that are required to do so (reporting platforms). This particular pattern leads to the generation of 1099-DA forms that incorrectly report a zero cost basis for the sold assets.
Across this cohort, the actual calculated capital gains amounted to $46 million. However, if investors were to rely solely on the information presented in their 1099-DA forms, they would be reporting approximately $481 million in gains. This discrepancy results in a gap of $435 million in inflated gains, averaging out to $14,500 per user within the analyzed sample. All monetary figures presented are in U.S. Dollars (USD).
The photo credit for the accompanying image is attributed to pcess609/iStock.
The emergence of the 1099-DA system marks a significant step in the IRS’s efforts to bring the largely untaxed cryptocurrency market into the fold of traditional financial reporting. However, as Summ’s analysis clearly demonstrates, the current infrastructure for reporting crypto transactions is failing to account for the complex, multi-platform nature of digital asset investing. This oversight is creating a substantial risk of overstated capital gains for millions of Americans, highlighting a critical need for either improved reporting mechanisms from exchanges or more sophisticated tools for investors to accurately track and report their tax liabilities. The long-term implications could include increased compliance costs for investors, a rise in tax disputes with the IRS, and a potential chilling effect on cryptocurrency adoption if tax burdens become overly punitive due to reporting errors.
