Crypto Tax Software Accuracy, 1099-DA, and the Coming Cost Basis Crisis with Tyler Menzer

A conversation with Tyler Menzer, PhD, CPA, and Assistant Professor of Accounting at Texas Christian University (TCU), discussing his research into cryptocurrency tax software accuracy, cost basis tracking failures, taxpayer responsibilities, IRS enforcement, audit risk, Revenue Procedure 2024-28, and the future of digital asset compliance. Host: Patrick Camuso, CPA, Camuso CPA Guest: Tyler Menzer, PhD, CPA, Assistant Professor of Accounting, Texas Christian University

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 00:01

Welcome to the latest episode of The Financial Frontier. I’m your host, Patrick Camuso. I’m very excited to introduce our guest today, Tyler Menzer, who is a PhD, CPA, and Assistant Professor of Accounting at Texas Christian University. Tyler’s recent research has documented some of the accuracy issues related to cryptocurrency tax software, including platforms used by taxpayers and, in some cases, relied upon during IRS enforcement efforts. What I want to do today is discuss his research in detail, have him explain some of the findings, add perspective from the practitioner side, and then explore how these issues may affect taxpayers as we move deeper into the digital asset compliance era and the rollout of Form 1099-DA. Tyler, thanks for joining us.

Tyler Menzer 00:58

Thanks for having me. I’m excited to be here and discuss something I’ve spent a lot of time researching and thinking about. Hopefully we can help people better understand some of the challenges and limitations that currently exist within the crypto tax software ecosystem.

Patrick Camuso, CPA 01:17

This is a challenge I’ve been dealing with professionally for almost a decade. That’s one reason I was excited to see your research. One of the key findings is that the exact same cryptocurrency transaction history can generate different tax outcomes depending on the software platform being used. In some cases, the same software can even generate different results over time. Can you walk us through the research methodology and some of the major findings?

Tyler Menzer 01:48

Absolutely. One thing that attracted many people to cryptocurrency early on was this idea that everything existed on-chain. The philosophy was often summarized as: “Code is law.” People assumed that because blockchain transactions are public and transparent, tax reporting should be relatively straightforward. The logic was: Everything is on-chain. Everything is observable. Just build an algorithm that reads the blockchain and produces a tax report. The problem is that tax law is more complicated than blockchain data. Not everything necessary to determine the correct tax treatment exists on-chain.

Patrick Camuso, CPA 02:31

That’s an important distinction.

Tyler Menzer 02:34

It really is. The blockchain tells you that a transaction occurred. But it often doesn’t tell you why it occurred. And that distinction matters enormously from a tax perspective. The software may see an incoming transaction. But it doesn’t know whether that transaction represents:

• A gift
• Compensation
• An airdrop
• A transfer between your own wallets
• Gambling winnings
• A capital transaction
• Something else entirely

The reason behind the transaction isn’t necessarily visible.

Patrick Camuso, CPA 03:09

So the software is forced to make assumptions.

Tyler Menzer 03:12

Exactly. And those assumptions may be correct in some situations and incorrect in others. That’s one reason different platforms often produce different answers.

Patrick Camuso, CPA 03:24

Your paper provides several examples. One of the biggest involves transfers from unknown wallets.

Tyler Menzer 03:31

That’s right. Imagine receiving cryptocurrency from an address that isn’t connected to your account profile. The software sees incoming crypto. But it doesn’t know what happened. Possible explanations include:

• A gift
• Income
• A transfer
• A reward
• Compensation

Those treatments can produce dramatically different tax outcomes. Without additional information, the software has no reliable way to determine which treatment is correct.

Patrick Camuso, CPA 04:03

And wallet transfers create another major issue.

Tyler Menzer 04:08

Exactly. Moving assets between your own wallets is generally not a taxable event. It’s effectively moving assets from your left pocket to your right pocket. However, those transfers frequently involve transaction fees. The treatment of those fees becomes more complicated. For example: If the transfer is simply moving assets between personal wallets, those fees may receive one treatment. If the transfer is part of a larger sale transaction, the fees may receive another treatment. The blockchain doesn’t necessarily tell the software which scenario applies.

Patrick Camuso, CPA 04:47

That’s one of the issues practitioners encounter constantly. There’s often a data quality problem layered on top of a tax characterization problem.

Tyler Menzer 04:57

Exactly. There are really two separate issues. First, data completeness. The software may not capture all transactions correctly. It may miss pricing data. It may misidentify transactions. It may fail to pull certain blockchain activity. Second, even when the transaction data is accurate, the tax treatment may still require additional context that doesn’t exist on-chain. That’s where many discrepancies originate.

Patrick Camuso, CPA 05:29

And taxpayers often don’t realize how much responsibility still falls on them.

Tyler Menzer 05:35

That’s one of my biggest takeaways from the research. Many taxpayers assume that if they import wallets into software, the resulting report must be correct. Unfortunately, that’s not always true. The software can be a valuable tool. But it isn’t a substitute for understanding what actually occurred.

Patrick Camuso, CPA 05:56

And that becomes even more important when we’re talking about audit defense and long-term recordkeeping.

Tyler Menzer 06:03

Absolutely. One issue we observed is that software calculations can change over time. Platforms update methodologies. They modify transaction classifications. They improve data collection. As a result, the same transaction history may produce a different result several years later. That’s why taxpayers should preserve records and documentation rather than assuming they’ll always be able to recreate prior calculations in the future.

Patrick Camuso, CPA 06:21

This research arrives at a particularly interesting time because we’re entering the Form 1099-DA reporting era. Many taxpayers have been accumulating digital assets for years. Some have basis histories stretching back a decade or more. How do you see these software accuracy issues intersecting with 1099-DA reporting?

Tyler Menzer 06:44

This is probably one of my biggest concerns. Generally speaking, I support third-party reporting. Historically, information reporting improves compliance. We’ve seen that repeatedly throughout the tax system. But cryptocurrency presents unique challenges because many taxpayers have long and complicated transaction histories. The basis information reported today often depends on transactions that occurred years ago. If those historical calculations were wrong, those errors may continue propagating forward indefinitely.

Patrick Camuso, CPA 07:18

And many taxpayers are still reconstructing five to ten years of activity.

Tyler Menzer 07:23

Exactly. One thing people often overlook is that cryptocurrency basis calculations aren’t isolated to a single tax year. Basis carries forward. Mistakes carry forward. Assumptions carry forward. Documentation gaps carry forward. So when a taxpayer sells assets in 2026, the correct answer may depend on transactions that occurred in 2017.

Patrick Camuso, CPA 07:50

Which means historical recordkeeping becomes critically important.

Tyler Menzer 07:55

Absolutely. The IRS statute of limitations is generally three years. In some situations, it can extend to six years. And in certain extreme circumstances, it can extend even longer. Taxpayers shouldn’t assume that because a transaction occurred years ago, it no longer matters.

Patrick Camuso, CPA 08:17

One concern I’ve had for years is that taxpayers often leave all of their records inside software platforms without independently preserving them.

Tyler Menzer 08:27

That’s a major risk. If a software platform changes methodologies, shuts down, or loses data, taxpayers may have difficulty recreating historical calculations. At minimum, taxpayers should retain:

• Transaction records
• Tax reports
• Cost basis documentation
• Reconciliation files

Those records become critical during audits.

Patrick Camuso, CPA 08:54

And the audit challenge becomes even more complicated because software calculations themselves can evolve over time.

Tyler Menzer 09:01

Exactly. There are really two separate issues. First, different software providers often produce different answers. Second, the same provider may produce different answers years later because the platform has changed. That’s a difficult environment from an audit perspective because taxpayers need to demonstrate what they reasonably relied upon at the time the return was filed.

Patrick Camuso, CPA 09:29

And many taxpayers assume they’ll simply regenerate the report later if they ever need it.

Tyler Menzer 09:35

Which may not be possible. The software may have changed. The underlying data feeds may have changed. The categorization logic may have changed. That’s why contemporaneous documentation matters so much.

Patrick Camuso, CPA 09:52

One thing practitioners are increasingly discussing is whether taxpayers understand how much enforcement risk is approaching.

Tyler Menzer 10:01

I think many taxpayers underestimate it. Again, I support information reporting. But information reporting creates visibility. And visibility eventually creates enforcement. The timing may vary. Political priorities may vary. But once information infrastructure exists, it’s generally used.

Patrick Camuso, CPA 10:24

Especially when those records become part of automated matching programs.

Tyler Menzer 10:29

Exactly. Taxpayers sometimes assume current enforcement levels will continue indefinitely. I wouldn’t make that assumption. The relevant question isn’t necessarily what enforcement looks like today. The question is what enforcement looks like several years from now when those returns are still potentially subject to examination.

Patrick Camuso, CPA 10:52

And that’s where basis accuracy becomes such an important issue.

Tyler Menzer 10:57

Absolutely. If taxpayers cannot substantiate how basis was calculated, they may find themselves in a very difficult position. The burden ultimately falls on the taxpayer to support the positions reflected on their return.

Patrick Camuso, CPA 11:14

Which is one reason these software limitations deserve much more attention than they’ve received historically.

Tyler Menzer 11:20

I completely agree. The software can be extremely helpful. But taxpayers should understand what it does well, what it doesn’t do well, and where additional review is necessary.

Patrick Camuso, CPA 11:36

One thing I found particularly interesting in your paper is that many crypto tax software providers include extensive disclaimers. In some cases, they’re very explicit that the user remains responsible for determining the correct tax treatment.

Tyler Menzer 11:52

That’s correct. And from a legal perspective, that makes sense. The software provider often lacks the information necessary to determine the correct answer. As we discussed earlier, many tax outcomes depend on facts that simply aren’t visible from blockchain data. The software can process transactions. It can apply rules. But it often cannot independently verify intent or economic substance.

Patrick Camuso, CPA 12:21

Which creates an interesting tension. Many taxpayers purchase software believing they’re purchasing certainty.

Tyler Menzer 12:29

Exactly. And certainty is often impossible. Tax law contains ambiguity. Facts matter. Circumstances matter. The software can help organize information and perform calculations, but it cannot eliminate uncertainty.

Patrick Camuso, CPA 12:47

Do you think taxpayers overestimate their ability to rely on software outputs if challenged by the IRS?

Tyler Menzer 12:56

Potentially. Good-faith reliance is certainly relevant in many contexts. But reliance doesn’t automatically make a tax position correct. Ultimately, taxpayers remain responsible for the positions reflected on their returns. That’s true whether the return was prepared manually, through software, or with professional assistance.

Patrick Camuso, CPA 13:22

And if the software made a mistake, the taxpayer may still need to explain and defend the position.

Tyler Menzer 13:28

Correct. The IRS generally examines the return itself. The question becomes: Was the reported position correct? Can it be substantiated? Can the taxpayer explain how the result was determined? Those questions don’t disappear simply because software was involved.

Patrick Camuso, CPA 13:51

Another issue practitioners encounter involves changes in cost basis methodologies. FIFO. LIFO. Specific identification. Average cost assumptions. How does software handle those decisions?

Tyler Menzer 14:04

Not always consistently. Different platforms support different methodologies. Different platforms implement methodologies differently. And some taxpayers don’t fully understand which methodology is being applied. That can create significant differences in reported gains and losses.

Patrick Camuso, CPA 14:25

Especially during volatile markets.

Tyler Menzer 14:29

Absolutely. When asset prices move dramatically, the choice of identification methodology can materially affect tax outcomes. Two taxpayers with identical transaction histories may report very different gains depending on how lots are identified.

Patrick Camuso, CPA 14:49

And that’s before we even introduce wallet transfers and missing basis data.

Tyler Menzer 14:55

Exactly. Once transfers become involved, complexity increases significantly. The software must determine:

• Which lots moved
• Which basis moved
• Whether records remain complete
• Whether acquisition history remains intact

Errors at any stage can affect downstream calculations.

Patrick Camuso, CPA 15:21

One concern I’ve had is that taxpayers often don’t realize how fragile some of these calculations can be. A single missing transaction can affect years of reporting.

Tyler Menzer 15:32

That’s absolutely true. Cryptocurrency reporting is highly interconnected. One missing transaction can alter:

• Cost basis
• Holding periods
• Gain calculations
• Loss calculations

And those changes can cascade forward across multiple tax years.

Patrick Camuso, CPA 15:56

Which makes audit defense particularly challenging.

Tyler Menzer 16:01

Exactly. The farther you move away from the original transactions, the harder reconstruction becomes. Memories fade. Records disappear. Platforms change. Exchanges close. Wallets are forgotten. That’s why maintaining documentation contemporaneously is so important.

Patrick Camuso, CPA 16:24

In some ways, taxpayers are creating future audit files today whether they realize it or not.

Tyler Menzer 16:31

That’s a great way to think about it. Every transaction creates future reporting obligations. The better organized those records are today, the easier future compliance becomes.

Patrick Camuso, CPA 16:47

And as third-party reporting expands, those historical records become even more valuable.

Tyler Menzer 16:53

Exactly. Information reporting increases visibility. Visibility increases scrutiny. And scrutiny increases the importance of documentation. Those trends all move together.

Patrick Camuso, CPA 17:08

One of the biggest developments occurring alongside these software issues is Revenue Procedure 2024-28 and the transition toward wallet-by-wallet accounting. How do you think that changes the compliance landscape?

Tyler Menzer 17:24

I think it significantly increases the importance of accurate recordkeeping. Historically, many taxpayers effectively viewed cryptocurrency holdings as one large pool. Revenue Procedure 2024-28 moves away from that approach. Now taxpayers need to understand not only what assets they own, but also where those assets are located. That creates additional complexity.

Patrick Camuso, CPA 17:51

And additional opportunities for errors.

Tyler Menzer 17:55

Exactly. Every transfer becomes more important. Every wallet becomes more important. Every record becomes more important. The underlying challenge remains the same: You need accurate historical information to produce accurate future reporting.

Patrick Camuso, CPA 18:17

One thing practitioners often discuss is that taxpayers are entering a new era where compliance expectations are increasing dramatically.

Tyler Menzer 18:27

I think that’s accurate. The cryptocurrency ecosystem spent many years operating with relatively limited reporting infrastructure. That environment is changing. Between:

• Form 1099-DA
• Revenue Procedure 2024-28
• Expanded enforcement initiatives
• Improved reporting systems

The overall direction is toward greater transparency.

Patrick Camuso, CPA 18:56

If you were speaking directly to taxpayers today, what would be your primary recommendation?

Tyler Menzer 19:04

Don’t assume the software is enough. Use the software. Leverage the technology. But understand the transactions. Review the outputs. Maintain records. And preserve documentation. Those practices reduce risk regardless of which software platform is used.

Patrick Camuso, CPA 19:29

And for taxpayers who have historical issues?

Tyler Menzer 19:34

Address them sooner rather than later. The longer problems remain unresolved, the harder they generally become to fix. Historical reconstruction is possible. But reconstruction becomes more difficult as time passes.

Patrick Camuso, CPA 19:53

One thing that stood out to me in your research is that this area remains surprisingly under-studied.

Tyler Menzer 20:01

I agree. There’s still a tremendous amount we don’t know. Future research could examine:

• How taxpayers respond to 1099-DA
• Whether reporting accuracy improves
• Whether compliance improves
• How audit outcomes evolve
• Whether software platforms become more consistent

The industry is changing quickly, which creates many opportunities for future study.

Patrick Camuso, CPA 20:31

And perhaps one advantage of all these reporting developments is that future researchers will have better data.

Tyler Menzer 20:39

Exactly. Data availability has always been one of the biggest challenges in cryptocurrency research. As reporting becomes more standardized, researchers should have better tools for understanding taxpayer behavior and evaluating policy outcomes.

Patrick Camuso, CPA 20:58

When you step back from the paper, what’s the single biggest lesson you hope taxpayers take away?

Tyler Menzer 21:06

The biggest lesson is that cryptocurrency taxation remains fundamentally dependent on facts and records. Technology helps. Software helps. Automation helps. But none of those things eliminate the need for accurate documentation and informed judgment. Taxpayers should view software as a tool rather than a substitute for compliance.

Patrick Camuso, CPA 21:36

That’s a message I think every practitioner would agree with. Tyler, this has been an excellent discussion. We covered cryptocurrency tax software accuracy, blockchain data limitations, cost basis challenges, audit risk, information reporting, Revenue Procedure 2024-28, and the future of digital asset compliance. Thank you for joining us and sharing your research.

Tyler Menzer 22:01

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

Patrick Camuso, CPA 22:08

And thank you to everyone listening. As digital asset reporting continues evolving, understanding both the strengths and limitations of tax technology will become increasingly important. If you enjoyed this episode, be sure to follow The Financial Frontier for future conversations covering cryptocurrency taxation, accounting, regulation, compliance, and financial innovation. Until next time, I’m Patrick Camuso, and this has been The Financial Frontier.