Part 6: Wallets & Recordkeeping — How to Protect Yourself in a Crypto Tax Audit

🧾 Wallets & Recordkeeping — How to Protect Yourself in a Crypto Tax Audit (2025)

In crypto taxation, your records matter more than your memory.
The IRS expects clear proof of when you bought, sold, swapped, received, or spent every digital asset.
Without proper wallet tracking and documentation, even honest investors can look like they are hiding income.

1️⃣ Why Wallets Matter for Taxes

A crypto wallet is more than just an app or device — it is the starting point of your tax trail. Every movement of assets in or out of a wallet can create:

• Taxable income (staking, mining, rewards, payments)
• Capital gains or losses (sales, swaps, spending)
• Non-taxable transfers (moving assets between your own wallets)

During an audit, the IRS may ask you to prove:

• Which wallets you control
• Where each deposit came from
• How you calculated cost basis and fair market value

2️⃣ Types of Wallets: Custodial, Non-Custodial, Hot & Cold

Not all wallets are treated the same from a compliance and documentation standpoint.

💠 Custodial Wallets

• Provided by exchanges or platforms (e.g., centralized exchanges)
• They control the private keys
• Often provide CSV exports and transaction histories

💠 Non-Custodial Wallets

• You control the private keys
• Examples: MetaMask, hardware wallets
• You must maintain your own records using explorers or software

💠 Hot vs Cold Wallets

• Hot: connected to the internet (convenient but higher risk)
• Cold: offline hardware or paper wallets (more secure, but easy to “forget” for tax)

3️⃣ What Records the IRS Expects You to Keep

The IRS expects detailed documentation for every taxable crypto transaction.
At a minimum, your records should include:

• Date and time of each transaction
• Type of transaction (buy, sell, swap, income, transfer)
• Amount of crypto and its USD fair market value
• Wallet addresses involved
• Exchange or platform used
• Transaction fees and gas fees

These records support the numbers you enter on your tax return and Form 8949.

4️⃣ Practical Tracking Methods (Spreadsheets & Software)

There are two main approaches to tracking crypto activity:

💠 Manual Spreadsheets

• Best for low transaction volume
• You log each trade, swap, income event, and transfer
• Useful for understanding how cost basis and gains really work

💠 Crypto Tax Software

• Connects to exchanges and wallets via API or CSV
• Automatically identifies transfers vs taxable events
• Generates Form 8949 reports and tax summaries

5️⃣ Common Mistakes & Audit Triggers

Many taxpayers get into trouble not because of fraud, but because of sloppy records.

Common issues include:

• Missing transaction history from closed exchanges
• No documentation for wallet-to-wallet transfers
• Unreported income from staking or airdrops
• Ignoring NFTs or smaller chains

❓ Frequently Asked Questions

🔗 Reference Links

📚 Crypto Taxation Series (2025)

🔝 Back to Top