U.S. taxpayers are required to report cryptocurrency sales, trades, payments, and income to the IRS. But cryptocurrency is still relatively new to mainstream personal finance, so you may be wondering if or how it’s going to affect your tax return. Understanding how to report crypto on taxes remains complex. Below, we’ve created a guide to what’s taxable, what’s not, and what to take note of as you prepare to file your 2025 tax return.
What is a digital asset?
The IRS defines cryptocurrency as digital assets, stating, “A digital asset is a digital representation of value that is recorded on a cryptographically secured, distributed ledger or any similar technology.”
It’s important to note that not all digital assets are cryptocurrencies. Although not an exhaustive list, convertible virtual currency and cryptocurrency, stablecoins, and non-fungible tokens (NFTs) are examples of digital assets.
The IRS requires taxpayers to answer a question on their federal income tax return indicating if they received, sold, or exchanged digital assets in the year for which you’re filing. If you did, you could be taxed.
Tokens and native assets
Tokens can be minted, which refers to the process of creating a new token or digital asset on a blockchain. Certain tokens, depending on their provenance, could be defined as a token but not a cryptocurrency because they’re not the native unit of a blockchain. Types of tokens include but are not limited to utility tokens, NFTs, wrapped tokens, governance tokens, security tokens, or CBDCs (Central Bank Digital Currencies).
Then, there are native assets, which are the primary coins of a blockchain network. They are integral to the network. These tokens could be classified as property, securities, or even commodities, depending on their function. Native coins are almost always treated as property.
Understanding “what is the thing?” — is it currency, property, a security, something else? — is critical. This can impact capital vs. ordinary income, reporting requirements, and potentially other tax considerations.
How is a digital asset taxed?
Digital asset transactions involve many intricate tax considerations because of the unique nature and structure of these assets and the ways they can be used. Before addressing the taxation of digital assets, the most fundamental question to ask is: “What exactly is the asset?”
Crypto transactions are taxable in two categories: income and capital gains. The category is determined both by how you received the cryptocurrency and how long you held onto it before selling.
The current U.S. laws state that all income is taxable — even cryptocurrency. Essentially, the tax rules applied to transactions involving any other property are the same when applied to crypto. Therefore, if you receive cryptocurrency as payment for services, goods, or employment, it’s considered ordinary income and is taxable the same as if you had received a cash payment. Taxpayers much determine the fair market value of virtual currency in U.S. dollars at the date of payment or receipt.
There are other specifics to note too. For example, convertible virtual currency paid to employees as wages or to independent contractors is also taxable.
Practices like mining crypto and staking holdings to earn a reward (or receiving crypto as part of an incentive or reward of some kind) counts as earning taxable income.
However, if you bought crypto without transferring, selling, or otherwise using it, it does not qualify as a taxable event. Similarly, gifting cryptocurrency under the annual exclusion limit or transferring between wallets is not taxed.
Do you have to pay tax on crypto gains?
For tax purposes, the IRS treats cryptocurrency (including convertible virtual currencies) as property.
Selling crypto for U.S. dollars or another fiat currency, trading one cryptocurrency for another (e.g., BTC to ETH), and spending crypto on goods or services (e.g., buying something with BTC) are all taxable events.
If you hold the cryptocurrency for one year or less before selling, you'll realize short-term capital gains, which is taxed at ordinary income rates. Holding for more than a year qualifies you for the lower long-term capital gains tax rates.
Therefore, the following are examples of taxable events where you could owe tax:
- Selling cryptocurrency for fiat currency. If you sell your cryptocurrency for fiat (government-issued) currency, the transaction is taxable because it’s treated as a sale. This is similar to how a stock or bond would be taxed; you recognize a capital gain or loss based on the difference between your cost basis (purchase price) and the sale of proceeds. For example, if you bought one Bitcoin for $5,000 and sold it for $10,000, you have a taxable gain of $5,000. However, if you sell at a loss, you may be able to deduct that loss on your tax return, subject to certain limitations.
- Exchanging one cryptocurrency for another. If you exchange one cryptocurrency for another, this is also a taxable event. You’ll owe taxes if you sold your crypto for more than you paid for it because you effectively disposed of one asset for another. For example, trading two Ethereum worth $2,000 for one Litecoin can trigger capital gains or losses based on the fair market value of the Ethereum at the time of the trade and the difference of the original purchase price.
- Spending cryptocurrency on goods and services. The IRS treats spending crypto the same as selling it. Exchanging a digital asset, including using it to pay for goods or services, is considered a disposition of property. In other words, every time you use crypto to buy something, whether it’s coffee, software, or travel, it’s treated as if you sold the cryptocurrency. Therefore, no matter what you pay for with crypto, it’s subject to capital gains tax. For example, say you bought 0.01 BTC to buy a $500 item, then used that 0.01 BTC to buy a $500 item. The gain realized would be the fair market value of $500 minus the basis of $300, which gives you a $200 capital gain.
Can you deduct crypto losses?
You may be able to deduct cryptocurrency losses when a transaction results in a realized loss, meaning the value of the crypto at the time of sale or use is lower than your original cost basis. Losses can occur when you sell crypto for less than you paid, exchange one cryptocurrency for another at a lower value, or use crypto to purchase goods or services worth less than the crypto’s cost basis.
In these situations, losses can generally be used to offset realized capital gains, and if total losses exceed gains, up to $3,000 may be deducted against ordinary income in a given tax year.
However, not all crypto transfers trigger a deductible loss. Moving crypto between wallets you own typically has no tax impact, but sending crypto to a wallet owned by someone else may have tax implications.
For example, if you bought Bitcoin for $50,000 and later used it to buy a car when its value dropped to $40,000, you would realize a $10,000 capital loss. That loss could be used to offset capital gains or, if gains are insufficient, up to $3,000 of ordinary income.
New crypto tax laws for 2025 tax year
Starting in 2025, cryptocurrency reporting becomes more formal and therefore more visible to the IRS. A new reporting form, Form 1099-DA, will be issued by many centralized crypto exchanges to report digital asset sales and certain other disposals.
In most cases, these forms will show only gross proceeds, not what you originally paid for the asset (cost basis). That means the IRS may see the sale, but not the full picture. If your tax return doesn’t clearly report cost basis, you could face questions or notices, even if the transaction ultimately results in little or no taxable gain.
The IRS has effectively moved taxpayers to wallet-by-wallet basis tracking for digital assets. This ends the prior approach of “universal wallet,” which is no longer acceptable. The final regulation (T.D.10000) states that brokers must report gross proceeds for sales on or after Jan. 1, 2025, and basis on certain covered transactions on or after Jan. 1, 2026.
Each account functions as its own ledger, whether it’s an exchange account, software wallet, or hardware device. For investors who move crypto between wallets or trade across multiple platforms, this change increases the importance of consistent recordkeeping.
With expanded reporting and stricter tracking rules, 2025 marks a shift toward greater scrutiny of crypto activity and a higher bar for accurate reporting.
What forms do you have to use?
When reporting cryptocurrency on your tax return, the key forms you will use are:
- Form 1040: Report your overall income, including any crypto received as payment.
- Schedule D and Form 8949: Use these to report capital gains and losses from the sale or exchange of your cryptocurrencies. Here, you’ll list each transaction, including the date acquired, date sold, proceeds, cost basis, and gain or loss.
Keep track of your crypto transactions throughout the year
Maintaining detailed records of your cryptocurrency transactions is essential for accurate reporting. Because a large range of transactions qualify as taxable, it’s critical to keep detailed notes on your portfolio.
Keeping accurate records of your basis when acquiring and selling crypto is extremely important because it’s used to determine taxable gain or loss. If basis is not accurately tracked, you risk misreporting your tax liability.
Crypto transactions are often complex — involving multiple wallets, exchanges, and events like forks or airdrops that adjust basis — making accurate tracking even more essential. Additionally, basis impacts whether gains are classified as short-term or long-term, which affects the tax rate applied. In short, basis is the foundation for accurate tax reporting and failing to track it can lead to significant financial and compliance risks.
Here are some effective tracking strategies:
- Maintain a spreadsheet — or pay for a service. With wallet-by-wallet cost basis tracking starting with the 2025 tax year, brokers (centralized exchanges) will issue the 1099-DA reporting gross proceeds to the IRS, so maintaining precise, verifiable transaction data is vital. There are several paid platforms that allow users to track historic crypto transaction data and generate gain/loss reports. The flip side to this is if one uses a “private wallet” or “unhosted” wallet service; this is where the user controls the private keys or crypto per sense rather than relying on a third-party custodian or exchange. Crypto portfolio tracking tools like CoinLedger, CoinTracker, or Koinly automatically connect your wallets, capture transaction history, and compute per-wallet cost basis and proceeds using compliant methods such as FIFO or Specific Identification. Accurately tracking this information is crucial for determining your taxable gains or losses.
- Keep exchange records. Save all records from exchanges and wallets, including transaction histories and any tax documents they provide.
- Update your records regularly. To avoid a year-end scramble, aim for monthly tracking to stay organized.
Reporting cryptocurrency on your tax return, especially as tax laws around crypto continue to change, is becoming increasingly complex. By recognizing which transactions are taxable, keeping complete and accurate records throughout the year, and keeping your tax advisor up to date on any gains, you can avoid any unexpected tax bills or unwanted IRS attention.
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