Maintaining trust and compliance is paramount when it comes to Cryptocurrency in 2024. As the industry continues to evolve, so too do the regulatory and policy landscapes that govern it. In this BlockSentry blog, we delve into the intricacies of crypto auditing, shedding light on how it happens, the types of fraud it flags, and what companies need to know to stay compliant.

How Crypto Auditing Happens

Crypto auditing is the process of examining cryptocurrency transactions to ensure compliance with regulatory requirements and detect any fraudulent activity. This can be carried out through both internal and external auditing methods. Regulatory bodies and compliance standards play a crucial role in shaping auditing practices, providing guidelines for companies to follow.

Types of Fraud Flagged in Crypto Audits

Various types of fraud can be flagged during crypto audits, including money laundering, terrorist financing, and fraudulently raised funds. These activities pose significant risks to the integrity of the cryptocurrency ecosystem and are closely monitored by auditors. Real-world examples serve as stark reminders of the importance of vigilance in detecting and preventing fraudulent behavior.

When facing an IRS crypto audit, being transparent and organized is key. Here are the most common inquiries you can expect:

  • Wallet IDs and blockchain addresses: Provide all wallet IDs and blockchain addresses controlled by you.
  • Digital currency exchange details: Include information on all digital currency exchanges and peer-to-peer facilitators, both foreign and domestic.
  • Transaction details: Report the date, time, basis, and fair market value of each unit of virtual currency acquired and disposed of.
  • Explanation of calculation method: Clarify the method used to calculate the basis related to the sale or disposition of cryptocurrency.

How a Crypto Tax Audit Works

If you receive a letter from the IRS, it’s likely the beginning of a crypto tax audit. During the audit, the IRS will examine your financial records, including cryptocurrency trading history, bank statements, and more. The length of the audit depends on the complexity of your financial history, but typically, you’ll receive a letter with findings and any owed taxes within 30 days.

What You Need for a Crypto Audit

For a smooth audit process, gather records of your crypto activities for at least the last three years. You must accurately report your crypto earnings, including transaction history, capital gains calculation methods, and all crypto activity. Additionally, provide details of exchanges and wallets, blockchain addresses, and user IDs.

The IRS usually audits tax returns filed in the last three years but can go back further if significant errors are found. It’s crucial to keep records used for tax returns for at least three years from filing.

Tools and Technologies Used in Crypto Auditing

Auditors leverage a range of tools and technologies to monitor and analyze cryptocurrency transactions. Blockchain analytics platforms, transaction monitoring software, and other advanced tools are employed to identify suspicious activities and track the flow of funds across the blockchain. These technologies are essential for ensuring the transparency and accountability of cryptocurrency transactions.

Despite the advancements in crypto auditing technologies, challenges remain. The rapidly evolving nature of the cryptocurrency landscape presents ongoing challenges for auditors, who must stay abreast of emerging trends and innovations. Looking ahead, the integration of artificial intelligence and machine learning holds promise for enhancing the effectiveness and efficiency of crypto audits.


Crypto auditing is an essential component of maintaining trust and integrity in the digital economy. By understanding how crypto audits happen, the types of fraud they flag, and the compliance requirements involved, companies can navigate the regulatory landscape with confidence. Be sure to consult your cryptocurrency tax specialist to remain compliant and ask any questions regarding your wallet.