Kraken Highlights Massive Tax Reporting Burden for Crypto Users

Millions of Forms for Tiny Transactions Create Unprecedented Paperwork

Cryptocurrency exchange Kraken recently revealed a staggering figure that underscores the overwhelming complexity of current tax regulations for digital asset holders. The company disclosed that it filed an astounding 56 million crypto-transaction forms with the U.S. Internal Revenue Service for the 2025 tax year alone. What makes this number particularly eye-opening is the nature of these transactions—the vast majority involved trivial amounts that create disproportionate administrative burdens for both taxpayers and the tax collection system itself. According to Kraken’s analysis, approximately 18.5 million of these forms covered transactions worth less than a single dollar, while more than half of all forms reported transactions of $10 or less. This revelation paints a picture of a tax reporting system struggling to adapt to the unique characteristics of cryptocurrency, where micro-transactions are common and the technology enables fractional ownership and frequent small-value exchanges that traditional financial systems rarely encounter.

The numbers become even more striking when examining the distribution of transaction values across these millions of forms. Kraken reported that only 8.5% of the newly introduced Form 1099-DAs exceeded $600, which is the standard threshold that triggers reporting requirements for non-employee compensation in traditional finance. Even more telling, 74% of all forms covered transactions of less than $50. This means that the overwhelming majority of crypto tax forms being generated involve amounts so small that the administrative cost of processing them likely exceeds any tax revenue they might generate. Each of these forms doesn’t just represent a filing to the IRS—it’s also sent to the customer, creating a reconciliation task for every taxpayer who receives one. For active crypto users who might engage in dozens or hundreds of transactions throughout the year, this creates a mountain of paperwork that must be carefully reviewed, organized, and reconciled against personal records. Making matters worse, standard tax preparation software that handles traditional investments and income sources isn’t equipped to process cryptocurrency transactions, forcing crypto holders to invest in specialized tax software. Kraken estimates this additional burden costs active crypto holders between $250 and $500 annually just for the dedicated software, and that’s on top of the standard costs of filing taxes.

The Hidden Costs of Crypto Tax Compliance

The financial and time burden extends far beyond just software costs. Kraken emphasized that “the hours taxpayers spend reconciling these micro-transactions, often with incomplete data, generate costs wildly disproportionate to any revenue the IRS will collect from them.” To put this in perspective, the exchange cited research from the Tax Foundation estimating that individual tax returns already cost Americans a combined $146 billion in time and expenses each year. The National Taxpayers Union Foundation calculates that the average non-business filer spends about 13 hours and $290 per return on tax preparation. For cryptocurrency holders, these numbers can be significantly higher due to the complexity and volume of transactions that need to be reported. Adding another layer of difficulty to an already complicated process, the broker reporting system for 2025 provides gross proceeds without cost basis information. This means the forms show what was sold and for how much, but they don’t include information about what the asset was originally purchased for—a critical piece of information needed to calculate actual gains or losses. Kraken reported fielding thousands of customer questions about forms that captured only one side of this calculation, leaving taxpayers to hunt through their own records to find the missing information needed to accurately complete their tax returns.

Two Fundamental Problems with Current Tax Code

Kraken identified two specific aspects of the current tax code that create particular problems for cryptocurrency users. The first issue is the lack of a de minimis exemption—a minimum threshold below which transactions wouldn’t need to be reported. In traditional finance, small transactions often fly under the radar, but with cryptocurrency, even the tiniest purchase can trigger a taxable event that must be declared. Kraken illustrated this problem with a relatable example: “Imagine you walk into a Steak ‘n Shake and pay for a $7.99 meal with Bitcoin through a payment app. You have triggered a taxable event. You are technically required to look up the cost basis of the specific Bitcoin you spent, calculate whether you had a gain or loss on that fraction of a coin, and report it on Form 8949.” This scenario isn’t just theoretical—it reflects the reality facing anyone who wants to use cryptocurrency for its intended purpose as a medium of exchange. The absurdity of this requirement becomes even clearer when considering someone who regularly makes small purchases with crypto. The libertarian think tank Cato Institute recently made a similar argument, pointing out that buying a cup of coffee every day with Bitcoin “can result in over 100 pages of tax filings.” This creates a situation where the paperwork burden of using cryptocurrency for everyday purchases becomes so onerous that it effectively discourages people from using digital assets as actual currency, relegating them instead to investment vehicles that are held and traded rather than spent.

The Staking Rewards Dilemma

The second major issue Kraken highlighted involves staking rewards—a common way for cryptocurrency holders to earn returns on their digital assets. Under current IRS rules, rewards earned on staked assets are treated as ordinary income at the moment they’re received, based on the token’s market price on that particular day. This creates a significant problem because most holders don’t immediately sell these rewards; they keep the tokens in their portfolio. However, they still owe taxes on the full value of those tokens as of the date they were received, even though they haven’t converted them to cash. This situation becomes particularly problematic when cryptocurrency prices are volatile. If the token’s price falls between the time the rewards are received and when taxes are due, holders can find themselves owing taxes that exceed the current value of the assets. Kraken calls this “phantom income”—being taxed on value that has effectively disappeared but that the taxpayer still owes money on because of when it was technically “received.” According to Kraken, a large share of the sub-dollar 1099-DA forms it issued were for these staking distributions, meaning taxpayers are receiving tax forms and incurring reporting obligations for fractions of a dollar in staking rewards that may have further decreased in value since they were earned.

Proposed Solutions and Legislative Efforts

There is some movement toward addressing these issues, though current proposals fall short of what Kraken and other industry advocates are requesting. Legislation currently moving through Congress includes a de minimis provision that would exempt small transactions from reporting requirements, but this provision is limited only to stablecoins—cryptocurrencies designed to maintain a stable value relative to a reference asset like the U.S. dollar. While this would help users of stablecoins for everyday transactions, it wouldn’t address the broader problem for Bitcoin, Ethereum, and thousands of other cryptocurrencies that people might want to use for purchases. Kraken is advocating for a much broader solution: an inflation-indexed exemption that would apply across all cryptocurrencies, paired with anti-abuse guardrails designed to prevent structuring—the practice of intentionally breaking up larger transactions into smaller ones to avoid reporting requirements. This would allow someone to buy that meal or coffee with cryptocurrency without triggering a taxable event and the associated paperwork, while still maintaining safeguards against tax evasion. Regarding staking rewards, Kraken is asking Congress to give taxpayers the option to choose when these rewards are taxed. Instead of the current system that treats all staking rewards as income at the moment of receipt, taxpayers could elect to be taxed either under the current rules or alternatively at the time of sale, when they actually realize a gain or loss by converting the tokens to cash or another asset. Kraken points out that its systems and those of other exchanges already have the technical capability to support both reporting methods—the missing piece is simply congressional authorization to give taxpayers this choice, which would align cryptocurrency staking more closely with how other investment income is treated in the tax code.