Crypto tax reporting

The IRS treats cryptocurrency and digital assets as property, not currency (IRS Notice 2014-21, reinforced by subsequent guidance). This means every disposal of crypto — selling, trading, spending, or exchanging — is a taxable event subject to capital gains rules, just like stocks or real estate.

49 steps across 12 sections

1. Gather All Transaction Records

  • Download transaction history (CSV) from every exchange you used (Coinbase, Kraken, Gemini, Binance.US, etc.)
  • Collect records from DeFi protocols (use blockchain explorers like Etherscan)
  • Gather records for any peer-to-peer transactions, mining income, staking rewards
  • Collect any 1099-DA forms received from brokers (new for 2025 tax year)
  • Note: wallet-to-wallet transfers, DeFi activity, and on-chain actions generally will NOT appear on 1099-DA

2. Determine Cost Basis for Each Asset

  • Identify the purchase price + any fees paid for each lot of crypto acquired
  • For crypto received as income (mining, staking, airdrops): cost basis = FMV at date of receipt
  • For gifted crypto: cost basis = donor's original basis (or FMV at gift date if lower, for loss purposes)
  • For inherited crypto: cost basis = FMV at date of death (stepped-up basis)
  • Choose and consistently apply a cost basis method (FIFO, LIFO, Specific ID — see below)

3. Calculate Gains and Losses for Each Disposal

  • For each sale, trade, or spending event: Gain/Loss = Proceeds - Cost Basis - Fees
  • Classify as short-term (held <= 1 year) or long-term (held > 1 year)

4. Complete Form 8949

  • List every taxable disposal on Form 8949
  • Part I: Short-term transactions (held one year or less)
  • Part II: Long-term transactions (held more than one year)
  • Each line requires: description, date acquired, date sold, proceeds, cost basis, gain/loss
  • Check the appropriate box (A, B, or C for short-term; D, E, or F for long-term) based on whether a 1099-DA was received and whether basis was reported to the IRS

5. Transfer Totals to Schedule D

  • Schedule D summarizes Form 8949 totals
  • Separates short-term and long-term gains/losses
  • Calculates net capital gain or loss

6. Report Crypto Income

  • Mining/staking income (business): Schedule C
  • Mining/staking income (hobby/non-business): Schedule 1, Line 8z
  • Airdrops, hard forks, DeFi yields: Schedule 1, Line 8z (or Schedule C if business)
  • Wages paid in crypto: W-2 (employer handles)

7. Answer the Digital Asset Question

  • Form 1040, page 1: Answer "Yes" to the digital asset question if you had any crypto transactions during the year

8. File and Retain Records

  • File by April 15 (or October 15 with extension)
  • Retain all records for at least 3 years (6 years recommended, as the IRS statute of limitations extends to 6 years for substantial understatements)

9. Capital Gains / Losses Events (reported on Form 8949 + Schedule D)

  • Selling crypto for fiat currency — Selling BTC for USD triggers a capital gain or loss based on the difference between your cost basis and the sale proceeds.
  • Trading one crypto for another — Swapping BTC for ETH is treated as two transactions: a sale of BTC and a purchase of ETH. The "sale" of BTC triggers capital gains/losses. Like-kind exchange (Secti...
  • Spending crypto on goods or services — Using crypto to buy a coffee, a car, or anything else is treated as selling the crypto at fair market value. If the FMV at spending exceeds your cost basis, y...
  • Liquidating or closing a position — Converting crypto back to stablecoins (USDT, USDC) is a taxable disposal.
  • NFT sales — Selling an NFT triggers capital gains. The IRS has indicated certain NFTs (profile pictures, digital art) may be classified as collectibles, subject to a higher maximum long-term capita...
  • DeFi token swaps — Using a DEX (Uniswap, SushiSwap) to swap tokens is a taxable trade event.
  • Removing liquidity from DeFi pools — If you receive different tokens or different amounts than you deposited, the difference may trigger capital gains.

10. Ordinary Income Events (reported on Schedule 1, Schedule C, or as wages)

  • Mining rewards — Crypto received from mining is ordinary income at fair market value on the date of receipt. If mining is a trade or business, report on Schedule C (subject to self-employment tax)....
  • Staking rewards — Treated like mining: ordinary income at FMV when you gain "dominion and control" over the tokens. When you later sell staked rewards, you owe capital gains on any appreciation abo...
  • Airdrops — Airdropped tokens are ordinary income at FMV once you have dominion and control (can freely move, sell, or exchange). If you receive an unsolicited airdrop you cannot access or sell, it ...
  • Hard fork proceeds — If a hard fork results in new coins you can access, the FMV at the time of receipt is ordinary income.
  • DeFi yield farming / liquidity mining rewards — Tokens earned from yield farming are ordinary income at FMV when received.
  • Interest from crypto lending platforms — Interest earned on platforms like Aave, Compound, or centralized lenders is ordinary income.
  • Payment for goods or services in crypto — If you're paid in crypto for work (freelancing, wages, etc.), it's taxable income at FMV on the date received. Employers must report on W-2; independent co...
  • Referral bonuses and promotional rewards — Sign-up bonuses or earn-and-learn rewards from exchanges are ordinary income.

11. Form 1099-DA -- Key Details for 2026

  • 2025 tax year (filed 2026): Brokers report gross proceeds only. Cost basis is NOT required for brokers to report.
  • 2026 tax year (filed 2027): Brokers must report BOTH gross proceeds AND adjusted cost basis for "covered" digital assets (acquired on/after Jan 1, 2026, within the same broker account).
  • "Noncovered" assets: Assets transferred in from another wallet/exchange, or acquired before 2026, remain noncovered — broker cost basis reporting is optional for those. You are still responsible for tracking and report...
  • DeFi platforms: As of 2026, decentralized platforms are not yet required to issue 1099-DA (proposed rules for DeFi brokers are still being finalized).

12. FIFO (First In, First Out)

  • How it works: The first coins you purchased are treated as the first ones sold.
  • Tax impact: In a rising market, FIFO tends to produce higher gains (selling oldest, cheapest coins first). In a falling market, it can produce larger losses.
  • Default: If you don't specify a method, the IRS and most exchanges default to FIFO.

Common Mistakes

  • Not reporting at all
  • Forgetting crypto-to-crypto trades are taxable
  • Ignoring income from staking, mining, and airdrops
  • Using the wrong cost basis
  • Double-counting transfers as sales

Pro Tips

  • Use crypto tax software early
  • Tax-loss harvest strategically
  • Hold for over one year when possible
  • Use Specific Identification
  • Track everything from day one

Sources

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