Reporting Cryptocurrency Gains and Losses

The IRS added a single question to the front page of Form 1040 in 2019: “At any time during the tax year, did you receive, sell, exchange, or otherwise dispose of any digital asset?” Checking “No” when the answer is “Yes” is the tax equivalent of painting a target on your back. Cryptocurrency is no longer the gray area it was in 2017 — the IRS treats digital assets as property, every transaction is potentially taxable, and beginning in 2025, brokers are filing Form 1099-DA to report your sales directly to the government.

TL;DR

Crypto is taxed as property, not currency. Every sale, swap, and spending event triggers a capital gain or loss. Short-term gains (held ≤1 year) are taxed at ordinary rates up to 37%; long-term gains get the preferential 0/15/20% rates. Starting in 2025, custodial exchanges report gross proceeds on the new Form 1099-DA, and cost basis reporting follows in 2026. Track your basis meticulously — the IRS matching program is coming.

How Crypto Is Taxed: Property, Not Currency

Since IRS Notice 2014-21, cryptocurrency and digital assets have been classified as property for federal tax purposes. This means every disposition — sale, exchange, trade, or spending — is a taxable event subject to capital gains rules, just like selling stock.

Taxable Events

• Selling crypto for fiat currency (BTC → USD)
• Trading one crypto for another (BTC → ETH) — this is a sale of BTC and a purchase of ETH
• Spending crypto on goods or services — the IRS treats this as selling the crypto at fair market value
• Receiving crypto as payment for work — taxed as ordinary income at FMV on the date received
• Mining and staking rewards — taxed as ordinary income when received, at FMV on that date
• Airdrops — generally taxable as ordinary income when you gain dominion and control

NOT Taxable Events

• Buying crypto with fiat — no gain or loss until you sell
• Transferring between your own wallets — moving BTC from Coinbase to a hardware wallet isn’t a disposition
• Donating crypto to a qualified charity — no capital gains tax, and you may deduct the FMV (subject to AGI limits)
• Gifting crypto — generally no tax to the giver (gift tax rules apply above $18,000 per recipient in 2025)

The point is: the crypto-to-crypto swap is where most investors trip up. Trading BTC for ETH is two events — a sale of BTC (recognizing gain or loss) and a purchase of ETH (establishing new cost basis). Every trade on a decentralized exchange, every token swap, every liquidity pool entry creates a taxable moment.

Capital Gains Rates on Crypto

Crypto gains follow the same rate structure as stocks and other capital assets:

Short-term (held one year or less): Taxed at ordinary income rates — 10% to 37% depending on your bracket, plus the 3.8% NIIT if applicable.

Long-term (held more than one year): Taxed at preferential rates — 0%, 15%, or 20% depending on income, plus the 3.8% NIIT above the threshold.

For a high-income investor, the spread between selling crypto at 11 months (40.8% effective rate) versus 13 months (23.8%) is enormous. On a $50,000 gain, that’s a $8,500 difference — identical to the stock market math, because the IRS treats crypto gains identically.

KEY INSIGHT

Unlike stocks, crypto trades 24/7 and there are no wash sale rules for digital assets (as of 2025). This means you can sell a crypto position at a loss and immediately repurchase it — harvesting the tax loss without any waiting period. This is one of the few genuine tax advantages crypto has over traditional securities.

Cost Basis Methods: FIFO and Specific ID Only

Starting in 2025, the IRS requires that crypto cost basis be tracked on a wallet-by-wallet (account-by-account) basis. Each wallet or exchange account becomes its own cost basis ledger — you can’t mix lots across platforms.

The only accepted methods for digital assets are:

FIFO (First-In, First-Out): The default. Your oldest coins are sold first. In a rising market, this produces the largest gains because your oldest coins typically have the lowest cost basis.

Specific Identification: You choose which coins to sell. This requires identifying the specific units at or before the time of sale — you can’t apply it retroactively. Methods like HIFO (highest-in, first-out) and LIFO (last-in, first-out) are valid only if they operate as specific identification with proper documentation.

Why this matters: if you bought Bitcoin at $10,000 in 2020, $30,000 in 2021, and $60,000 in 2024, selling under FIFO means you’re selling the $10,000 lot first — creating a massive gain. Specific ID lets you sell the $60,000 lot, dramatically reducing your tax bill. But you must elect specific ID before the trade, not when filing your return.

The New Form 1099-DA (Starting 2025)

The IRS introduced Form 1099-DA (Digital Asset Proceeds From Broker Transactions) for transactions beginning January 1, 2025. Here’s what you need to know:

What’s Reported in 2025

• Gross proceeds from sales and exchanges on custodial platforms (Coinbase, Kraken, Gemini, etc.)
• The form is filed with the IRS and sent to you by January 2026

What’s NOT Reported in 2025

• Cost basis — brokers are not required to report basis until transactions occurring on or after January 1, 2026
• DeFi transactions — on-chain swaps, smart contract interactions, AMM trades, and staking rewards occurring outside custodial brokers
• Wallet-to-wallet transfers — these aren’t sales and shouldn’t generate a 1099-DA

What Changes in 2026

Starting with 2026 transactions, brokers must report both gross proceeds and cost basis — creating full IRS matching capability identical to stock brokerage reporting.

The point is: 2025 is the transition year. The IRS will see your proceeds but not your basis. If you can’t document your cost basis, the IRS may assume it’s zero — meaning your entire sale proceeds are treated as taxable gain. Get your records in order now.

REMEMBER

The 1099-DA only covers custodial brokers. If you traded on decentralized exchanges (Uniswap, dYdX), used DeFi protocols, or held assets in self-custody wallets, you’re responsible for tracking and reporting those transactions yourself. The IRS doesn’t exempt unreported transactions — it just means they’ll find them later.

Mining, Staking, and Airdrops: Ordinary Income

Income received through mining, staking, and airdrops is taxed differently from capital gains:

Mining income: Taxed as ordinary income at fair market value on the date the coins are received. For hobby miners, report on Schedule 1. For business miners, report on Schedule C (and pay self-employment tax of 15.3%). Your cost basis in the mined coins equals the income recognized.

Staking rewards: Taxed as ordinary income when received. There was uncertainty after the Jarrett v. United States case, where a Tennessee couple argued that staking rewards shouldn’t be taxable until sold. The IRS issued Revenue Ruling 2023-14 confirming that staking rewards are taxable upon receipt.

Airdrops: Generally taxable as ordinary income at FMV when you gain “dominion and control” — meaning when you can access and dispose of the tokens. Unsolicited airdrops to wallets you can’t access (dusting attacks) aren’t taxable until you can actually use them.

NFTs and Collectible Tax Rates

NFTs add another wrinkle. The IRS proposed in Notice 2023-27 that certain NFTs may be classified as collectibles, subject to the 28% maximum long-term capital gains rate instead of the standard 20%. The classification depends on whether the underlying asset the NFT represents would be a collectible — digital art, for instance, may qualify as a collectible, while an NFT representing a concert ticket may not.

This is still evolving guidance, but if you hold appreciated NFTs in taxable accounts, plan for the possibility of the 28% rate rather than assuming the standard 20%.

Record-Keeping: What You Need to Track

The IRS requires that you maintain records sufficient to establish your basis, the amount realized, and the date of each transaction. In practice, you need:

Crypto Tax Software

Manual tracking across multiple exchanges, wallets, and DeFi protocols is impractical for most active participants. Dedicated crypto tax software (CoinTracker, Koinly, TaxBit, CoinLedger) can import transaction histories via API and CSV, apply cost basis methods, and generate Form 8949 reports.

What this means in practice: if you traded on more than one platform or used any DeFi protocols, invest in a crypto tax tool. The cost ($50-$200/year) is trivial compared to the risk of incorrect reporting or missed transactions.

Tax-Loss Harvesting Without Wash Sale Restrictions

As of 2025, the wash sale rule does not apply to cryptocurrency. This is a significant advantage over traditional securities. You can:

1. Sell BTC at a loss on Monday
2. Immediately repurchase BTC on Monday
3. Claim the full capital loss on your return

This allows continuous tax-loss harvesting without any 30-day waiting period or the need to find “substantially identical” substitute assets. Some investors automate this process, harvesting crypto losses daily during volatile periods.

Warning: Congress has proposed extending wash sale rules to crypto multiple times. The Build Back Better Act (2021) and subsequent proposals included crypto wash sale provisions. This loophole may close — harvest while you can, but stay current on legislation.

Common Mistakes and Audit Triggers

1. Failing to report crypto-to-crypto swaps. Trading ETH for SOL is a taxable sale of ETH. Many investors only report when converting to USD.

2. Answering the 1040 digital asset question incorrectly. Checking “No” when you had taxable crypto activity is a red flag the IRS specifically looks for.

3. Assuming zero basis on assets purchased years ago. If you can’t find records of your original purchase, reconstruct them from exchange records, bank statements, or blockchain explorers. Zero basis means paying tax on the full proceeds.

4. Ignoring staking and mining income. These are ordinary income events, not capital gains. Omitting them understates your income.

5. Not accounting for gas fees. Transaction fees (gas) paid in crypto are themselves dispositions of crypto and may trigger small gains or losses.

Action Checklist

Essential (do these before filing)

• Answer the Form 1040 digital asset question honestly — “Yes” if you had any transactions
• Aggregate all exchange and wallet transactions into a single record — use crypto tax software if you traded on multiple platforms
• Calculate cost basis for every disposal — don’t rely on exchanges to do this correctly for 2025
• Report mining and staking income as ordinary income on the appropriate schedule

High-Impact (reduces tax bill)

• Harvest losses aggressively — no wash sale rules apply to crypto (for now)
• Use specific identification to sell highest-cost lots first — elect this before trading
• Hold appreciating crypto for over one year to qualify for long-term rates (0-20% vs up to 37%)
• Donate appreciated crypto to charity instead of selling — avoid capital gains entirely

Optional (for active crypto participants)

• Segregate wallets by purpose — separate trading, long-term holding, and DeFi activity for cleaner record-keeping
• Track DeFi transactions meticulously — LP entries/exits, yield farming rewards, and governance token distributions
• Review NFT holdings for potential collectibles classification (28% rate)

Your Next Step

Download your full transaction history from every exchange you used in 2025 (Coinbase, Kraken, Gemini — most offer CSV exports). Upload them to a crypto tax tool like CoinTracker or Koinly and run a preliminary tax report. Identify any positions with unrealized losses that could be harvested before year-end — and remember, you can repurchase immediately without triggering wash sale rules.