A friend of mine is looking to trade crptocurrencies and I subsequently warned him that he'll have to keep careful track of all of his transactions throughout the year because he would have a lot of paperwork come tax time. He jokingly mentioned that he'd wait for the IRS to send him a letter and then figure it out. This inspired me to look into how the IRS would even know that he had earned income by selling crypto and then I realized that at least one major exchange (Coinbase) doesn't report anything to the IRS for trades.
Their tax page is littered with disclaimers of "you should pay your taxes", but there's no effort on their - or other exchanges - part to actually inform the IRS of tax liability. Coming from a background of stock trading, this is absolutely insane to me. I can't imagine a world where I could day-trade stocks on Etrade and never be compelled to report it to the IRS; or taking distributions from a 401K and then pay nothing because the IRS doesn't know I did it. Obviously this is illegal, but without reporting systems in place I have to imagine that compliance would be insanely low - it's why the IRS has mandatory reporting for the rest of the financial market. The IRS knows when my bank pays me $11 in interest, but it wouldn't know when I made 200K selling Bitcoin. There's billions of dollars in active trading going on every year in crypto markets and all of it is completely outside the knowledge of the IRS.
Is crypto tax enforcement entirely dependent on random, individual audits? How do crypto exchanges evade the same level of responsibility/regulation of equity markets or banking?