Who Actually Reports Cryptocurrency to the IRS? New Research Using IRS Data with Tyler Menzer

A conversation with Tyler Menzer, Assistant Professor of Accounting at Texas Christian University (TCU), discussing new academic research using IRS administrative data to examine cryptocurrency tax reporting behavior, taxpayer compliance rates, reporting trends, the digital asset checkbox, and what the data reveals about crypto investors. Host: Patrick Camuso, CPA, Camuso CPA Guest: Tyler Menzer, Assistant Professor of Accounting, TCU

Editor’s Note

The following transcript has been lightly edited for publication. Grammar, punctuation, and transcription errors have been corrected for readability. The substance of the conversation has been preserved.

Transcript

Patrick Camuso, CPA 00:00

Welcome to the latest episode of The Financial Frontier. I’m your host, Patrick Camuso. I’m joined by a returning guest, Tyler Menzer, Assistant Professor of Accounting at TCU and co-author of a recent research paper that uses IRS administrative data to examine who actually reports cryptocurrency activity to the IRS. That’s going to be the center of our discussion today. Tyler, welcome back to The Financial Frontier.

Tyler Menzer 00:28

Thanks for having me.

Patrick Camuso, CPA 00:31

Before we get into the specific findings, can you give listeners a high-level overview of the paper, the work that went into it, and the questions you and your co-authors were trying to answer? What data did you use and what were the major findings?

Tyler Menzer 00:49

Absolutely. This project actually started while I was still in my PhD program around 2019 or 2020. I worked on it with two outstanding co-authors:

• Jaren Wild from the University of Iowa
• Jeff Hoopes from the University of North Carolina

Jeff also co-hosts the Tax Chats podcast with Scott Dyreng from Duke, which is another great resource for listeners interested in tax topics. The project originally grew out of conversations we were having around cryptocurrency and tax compliance. At the time, there was a lot of discussion about whether cryptocurrency could become a modern version of a tax haven. Historically, people associated tax avoidance with moving assets offshore. The question became whether crypto created a new mechanism for hiding taxable activity. That naturally led us toward a broader question: Who is actually reporting cryptocurrency activity to the IRS?

Patrick Camuso, CPA 01:58

And the IRS was directly involved in providing access to the data used in the research.

Tyler Menzer 02:04

Yes. Many people don’t realize that the Internal Revenue Code specifically authorizes the IRS to conduct research designed to improve tax administration and taxpayer compliance. Part of that authority allows qualified academic researchers to access anonymized administrative tax data. Everything is heavily protected. We don’t know who any taxpayer is. We never see names. We never see Social Security numbers. But we can analyze anonymized tax return information at scale. The IRS benefits because researchers can bring additional resources and perspectives. Researchers benefit because we gain access to data that would otherwise be impossible to obtain.

Patrick Camuso, CPA 02:49

And this wasn’t a small sample.

Tyler Menzer 02:52

Not at all. We essentially analyzed the full universe of federal income tax returns filed between 2013 and 2021. That means more than one billion tax returns. After adjusting for filing status, that represents roughly 220 million individual taxpayers. So we’re not working with a survey sample. We’re working with the actual tax filing population.

Patrick Camuso, CPA 03:22

That’s one of the reasons the study attracted so much attention. Most crypto research relies on surveys or exchange-provided information. This is actual IRS administrative data.

Tyler Menzer 03:34

Exactly. And because we have the actual tax return information, we can identify taxpayers who appear to be reporting cryptocurrency transactions. From there we can begin asking questions like:

• How many people report?
• What income levels do they have?
• How do they behave as investors?
• How has reporting changed over time?

Patrick Camuso, CPA 03:58

One thing I found interesting is that this study complements our previous discussion around cryptocurrency tax software accuracy. In that conversation we focused on whether taxpayers were calculating gains correctly. This study asks a different question. Whether taxpayers are reporting at all.

Tyler Menzer 04:16

That’s exactly right. The two papers are complementary. The software study focuses on accuracy. This paper focuses on participation. One limitation of our data is that we only observe people who actually file tax returns. We don’t observe people who own cryptocurrency but never report it. We don’t observe people who never file returns. So this study examines the reporting population. The next challenge becomes estimating the people who aren’t reporting.

Patrick Camuso, CPA 04:53

And that’s where some of the headline numbers from the study come from.

Tyler Menzer 04:58

Exactly. One of the most widely cited figures was the finding that approximately 6.5% of taxpayers reported cryptocurrency activity. Unfortunately, that number was sometimes misunderstood. That figure refers to all tax-filing adults in our dataset. It doesn’t mean only 6.5% of crypto users are reporting. Those are two very different questions.

Patrick Camuso, CPA 05:26

Which led to some confusion in the media coverage.

Tyler Menzer 05:30

It did. To estimate compliance among actual crypto owners, we had to use several external data sources. We compared IRS reporting activity against:

• Federal Reserve surveys
• Pew Research surveys
• YouGov surveys
• Academic credit card transaction data
• Public exchange user information

Using those sources, we estimated that somewhere between 32% and 56% of cryptocurrency owners were reporting taxable activity to the IRS during the period studied.

Patrick Camuso, CPA 06:07

Still a surprisingly low number.

Tyler Menzer 06:10

Yes. Even using the most conservative assumptions, the results suggest there was substantial underreporting during the period we studied. That isn’t necessarily surprising given the absence of third-party reporting, the complexity of cryptocurrency taxation, and the rapid growth of the market during those years. But it does help quantify the issue.

Patrick Camuso, CPA 06:38

And importantly, this study covers tax years before Form 1099-DA existed.

Tyler Menzer 06:45

Correct. Our sample ends in 2021. So we’re examining a world where cryptocurrency reporting largely depended on voluntary compliance. The next several years will likely look very different as reporting requirements become more formalized.

Patrick Camuso, CPA 07:02

Let’s dive deeper into those compliance numbers because that’s where many of the headlines focused. The study estimates that somewhere between 32% and 56% of cryptocurrency owners reported taxable activity to the IRS. Can you walk through how you arrived at those estimates?

Tyler Menzer 07:20

Absolutely. One challenge with IRS data is that we only observe taxpayers who actually report cryptocurrency activity. We don’t directly observe everyone who owns cryptocurrency. So we needed a way to estimate the broader ownership population. To do that, we relied on several external sources. First, we looked at large-scale surveys from organizations such as:

• The Federal Reserve
• Pew Research
• YouGov

These organizations use representative samples of the U.S. population and ask individuals whether they own cryptocurrency. Those surveys provide a reasonable estimate of overall adoption.

Patrick Camuso, CPA 08:00

Which is very different from surveys conducted by cryptocurrency exchanges.

Tyler Menzer 08:05

Exactly. If you survey users of a cryptocurrency platform, ownership rates are obviously going to be extremely high. That’s not representative of the broader population. We wanted sources that were designed to represent the general public.

Patrick Camuso, CPA 08:22

And then you supplemented those surveys with other data sources.

Tyler Menzer 08:26

Correct. One particularly interesting source came from another academic paper that used anonymized credit card transaction data. The researchers could identify when individuals were sending funds to major cryptocurrency exchanges such as:

• Coinbase
• Kraken
• Binance

The assumption is fairly straightforward. If someone is regularly sending money to a crypto exchange, there’s a strong likelihood they’re purchasing cryptocurrency. That provided an additional benchmark.

Patrick Camuso, CPA 08:58

And you also looked at public exchange data.

Tyler Menzer 09:02

Yes. We used publicly available user information reported by Coinbase. We adjusted those figures for estimated U.S. users and market share. That gave us a third independent estimate of cryptocurrency participation. What’s encouraging is that all three methodologies produced broadly similar results. Even though the approaches were different, the estimates generally pointed in the same direction.

Patrick Camuso, CPA 09:33

Which increases confidence in the findings.

Tyler Menzer 09:36

Exactly. No methodology is perfect. But when multiple independent approaches converge, that’s generally a good sign.

Patrick Camuso, CPA 09:48

The study also looked at blockchain activity itself.

Tyler Menzer 09:53

Yes. We compared reported cryptocurrency sales against Bitcoin transaction volume. I want to emphasize that this analysis comes with substantial limitations. Blockchain data doesn’t tell us:

• Which country a user is in
• Whether activity is personal or business-related
• Whether transactions occur on exchanges
• Whether activity generates taxable gains

So we’re not using blockchain volume to estimate compliance percentages. We’re using it directionally.

Patrick Camuso, CPA 10:28

Meaning you’re looking for correlation rather than exact measurement.

Tyler Menzer 10:33

Exactly. If cryptocurrency activity increases dramatically, we would generally expect reporting activity to increase as well. And that’s what we observe. As cryptocurrency trading volume rises, cryptocurrency reporting tends to rise. That’s consistent with what we’d expect if taxpayers are reporting at least some portion of their activity.

Patrick Camuso, CPA 10:59

But you also observed periods where blockchain activity increased without a corresponding increase in reporting.

Tyler Menzer 11:06

Particularly in the earlier years. If you go back to 2013, 2014, and 2015, reporting levels were extremely low. There simply wasn’t much awareness regarding crypto taxation. There wasn’t much guidance. There wasn’t much enforcement. And there certainly wasn’t any third-party reporting. So it isn’t surprising that reporting lagged actual activity during those early years.

Patrick Camuso, CPA 11:36

One thing that stood out to me was that despite all the limitations, the evidence consistently pointed toward meaningful underreporting.

Tyler Menzer 11:46

I think that’s fair. Now, I always want to be careful. Our study isn’t accusing any individual taxpayer of wrongdoing. There are many reasons why someone might not appear in our data. Some individuals simply held cryptocurrency and never sold it. Others may not have had filing obligations. But broadly speaking, the data suggests reporting rates were well below ownership rates.

Patrick Camuso, CPA 12:16

Which aligns with concerns the IRS has expressed for years.

Tyler Menzer 12:20

Exactly. The IRS has been concerned about cryptocurrency compliance for more than a decade. This study helps quantify the issue using actual administrative data rather than speculation.

Patrick Camuso, CPA 12:38

And perhaps most importantly, this is a snapshot of the pre-1099-DA environment.

Tyler Menzer 12:44

That’s exactly right. Everything we’re discussing occurred before standardized broker reporting. The reporting landscape is changing significantly. Future studies may look very different as third-party reporting becomes more comprehensive.

Patrick Camuso, CPA 13:02

One of the most interesting findings in the paper involved income levels. When people think about tax compliance, they often assume reporting increases steadily as income rises. But that’s not exactly what you found.

Tyler Menzer 13:18

That’s right. What we observed was more of an inverted U-shaped relationship. Reporting rates increased as income rose, but only up to a point. After reaching higher income levels, reporting rates actually began declining.

Patrick Camuso, CPA 13:36

That’s fascinating because it challenges some conventional assumptions.

Tyler Menzer 13:42

It does. Now, it’s important to be careful when interpreting those results. The data doesn’t tell us why the pattern exists. But there are several plausible explanations. One possibility is that middle- and upper-middle-income taxpayers are generally more engaged with tax compliance. They often work with advisors. They may have more traditional financial reporting habits. At very high income levels, taxpayers may have more complex financial arrangements or different types of crypto exposure. The data alone can’t distinguish between those explanations.

Patrick Camuso, CPA 14:22

But the pattern itself was statistically significant.

Tyler Menzer 14:26

Yes. It was one of the more surprising findings in the paper. And importantly, it remained fairly consistent across multiple specifications.

Patrick Camuso, CPA 14:38

Another area the paper explored was investor sophistication. What did you learn about the types of taxpayers reporting cryptocurrency activity?

Tyler Menzer 14:48

Generally speaking, cryptocurrency reporters tended to appear more financially engaged than the average taxpayer. They were more likely to report:

• Capital gains
• Investment income
• Stock transactions
• Other investment-related activities

That doesn’t necessarily mean they were professional investors. But they often appeared more financially active than the average filer.

Patrick Camuso, CPA 15:17

Which makes sense given the demographics commonly associated with cryptocurrency adoption.

Tyler Menzer 15:22

Exactly. The profile aligns fairly closely with what many surveys have suggested.

Patrick Camuso, CPA 15:30

One thing I found particularly interesting involved holding behavior. The study suggests cryptocurrency investors may behave differently than traditional equity investors.

Tyler Menzer 15:41

That’s right. When we compared cryptocurrency reporting patterns against stock reporting patterns, we observed some meaningful differences. Cryptocurrency investors appeared less sensitive to traditional tax incentives. For example, they seemed less likely to delay transactions solely to achieve long-term capital gain treatment.

Patrick Camuso, CPA 16:04

Which is surprising given the potential tax savings.

Tyler Menzer 16:08

It is. Traditional finance literature generally finds that investors respond strongly to tax incentives. Many stock investors delay sales specifically to obtain favorable long-term rates. Crypto investors appeared somewhat less responsive to those incentives.

Patrick Camuso, CPA 16:27

Do you think volatility plays a role?

Tyler Menzer 16:31

That’s certainly one possibility. Cryptocurrency markets are highly volatile. When assets are moving dramatically, investors may focus more on price movements than tax consequences. Again, we can’t directly observe motivations. But volatility is one plausible explanation.

Patrick Camuso, CPA 16:53

In other words, investors may be making economic decisions first and tax decisions second.

Tyler Menzer 16:59

Exactly. Traditional tax planning assumes investors carefully optimize around tax outcomes. Cryptocurrency investors may sometimes prioritize market opportunities instead.

Patrick Camuso, CPA 17:14

That’s something we see in practice as well. Many investors are focused on market movements, protocol developments, token launches, and other factors. Tax considerations often become secondary until filing season arrives.

Tyler Menzer 17:29

And that may partially explain some of the compliance challenges we’ve observed historically. The asset class evolved very quickly. The technology evolved quickly. The tax guidance evolved slowly. Those dynamics created an environment where reporting often lagged activity.

Patrick Camuso, CPA 17:52

One thing I appreciate about the study is that it moves the discussion beyond anecdotes. For years, people debated crypto compliance based largely on assumptions. This research provides actual evidence.

Tyler Menzer 18:05

That’s one of the primary goals of academic research. We’re trying to replace assumptions with data whenever possible. The reality is that cryptocurrency taxation has often been discussed without much empirical evidence. This study helps fill part of that gap.

Patrick Camuso, CPA 18:25

And it establishes a baseline before the introduction of widespread third-party reporting.

Tyler Menzer 18:31

Exactly. Future researchers will now have a benchmark. They can compare future reporting behavior against this pre-1099-DA environment and evaluate how reporting frameworks affect compliance.

Patrick Camuso, CPA 18:48

One development that occurred during the period covered by your study was the introduction of the digital asset question on Form 1040. The IRS clearly viewed that question as important. How do researchers think about disclosure questions like that?

Tyler Menzer 19:04

Disclosure questions are fascinating because they’re relatively inexpensive from an administrative perspective. You’re not creating an entirely new reporting system. You’re simply asking taxpayers a direct question. From a behavioral standpoint, those questions can have meaningful effects. They force taxpayers to stop and consider whether they’ve properly reported relevant activity.

Patrick Camuso, CPA 19:28

In some ways, it’s a compliance reminder built directly into the tax return.

Tyler Menzer 19:34

Exactly. Economists often refer to these types of interventions as behavioral nudges. The idea is that small changes in presentation or disclosure requirements can influence taxpayer behavior. The digital asset question effectively tells taxpayers: “We know this activity exists.” “We care about this activity.” “And we expect you to consider it when preparing your return.”

Patrick Camuso, CPA 20:03

Did your research find evidence that the question affected reporting?

Tyler Menzer 20:09

We observed increases in reporting activity following the introduction of the question. Now, it’s difficult to isolate causation because multiple things were happening simultaneously. Media coverage increased. IRS enforcement activity increased. Public awareness increased. But the timing is certainly consistent with the possibility that the disclosure question influenced behavior.

Patrick Camuso, CPA 20:38

Which aligns with broader tax compliance literature.

Tyler Menzer 20:42

Very much so. Tax compliance research has repeatedly shown that visibility matters. Awareness matters. Perceived enforcement matters. Disclosure requirements can influence behavior even when they don’t directly increase audits.

Patrick Camuso, CPA 21:02

As we move into a world of Form 1099-DA reporting, do you think future compliance studies will look dramatically different?

Tyler Menzer 21:11

I think they probably will. One of the most important limitations of our study is that it examines a largely voluntary reporting environment. Once third-party reporting becomes widespread, many of the underlying incentives change. Future researchers will have opportunities to examine questions such as:

• How reporting changes after 1099-DA
• Whether compliance rates improve
• Whether reporting accuracy improves
• How taxpayers respond to information returns
• How enforcement strategies evolve

There are many fascinating research opportunities ahead.

Patrick Camuso, CPA 21:52

And the data quality available to researchers may improve as well.

Tyler Menzer 21:57

Absolutely. One of the biggest challenges in cryptocurrency research has always been data availability. As reporting systems mature, researchers will gain access to richer datasets. That should lead to better evidence and better policy discussions.

Patrick Camuso, CPA 22:18

When you step back and look at the paper as a whole, what’s the biggest takeaway you want readers to understand?

Tyler Menzer 22:27

The biggest takeaway is probably that cryptocurrency reporting was substantially lower than ownership rates during the period we studied. That’s the core finding. At the same time, we also observed reporting improving over time. The story isn’t static. Taxpayer behavior evolved. Awareness increased. Compliance increased. The environment was already changing before formal broker reporting arrived.

Patrick Camuso, CPA 22:58

So the trajectory was moving in the right direction even before 1099-DA.

Tyler Menzer 23:03

That’s a fair characterization. And now the industry is entering an entirely new phase. The reporting infrastructure being built today will likely have significant effects on compliance behavior going forward.

Patrick Camuso, CPA 23:20

Tyler, this has been an excellent discussion. We covered your recent research using IRS administrative data, cryptocurrency reporting rates, taxpayer behavior, compliance trends, income-level reporting patterns, investor characteristics, the Form 1040 digital asset question, and what these findings may mean as the industry enters the 1099-DA era. Thank you for joining us and sharing your work.

Tyler Menzer 23:49

Thank you for having me. I enjoyed the conversation and appreciate the opportunity to discuss the research.

Patrick Camuso, CPA 23:57

And thank you to everyone listening. As cryptocurrency reporting continues evolving, understanding how taxpayers have behaved historically provides important context for where compliance may be headed next. If you enjoyed this episode, be sure to follow The Financial Frontier for future conversations covering digital assets, taxation, accounting, regulation, and financial innovation. Until next time, I’m Patrick Camuso, and this has been The Financial Frontier.