Understanding Crypto Tax Basics
IRS Treats Crypto as Property
The IRS classifies cryptocurrencies, NFTs, and stablecoins as property, not currency, meaning most transactions trigger taxable events. Selling, trading, or spending crypto results in capital gains or losses, while earning crypto through mining, staking, or airdrops is taxed as ordinary income. With Bitcoin hitting $109,993 in January 2025, accurate reporting is critical to avoid penalties, especially as IRS scrutiny intensifies.
Identifying Taxable Events
Key Transactions to Report
Taxable events include selling crypto for fiat, trading one cryptocurrency for another, using crypto for goods or services, and receiving crypto as payment, rewards, or through mining and staking. Non-taxable actions include buying crypto with fiat, holding assets, or transferring crypto between your own wallets. Form 1040’s digital asset question requires you to confirm whether you engaged in these activities.
New Reporting Requirements
Form 1099-DA and Broker Obligations
Starting January 1, 2025, crypto exchanges must report sales and exchanges via Form 1099-DA, detailing gross proceeds. From 2026, cost basis reporting will be mandatory, simplifying gain/loss calculations. DeFi platforms are exempt until 2026, but custodial brokers face stricter rules. Keep detailed records, as you’re responsible for reconciling cost basis on Form 8949 and Schedule D.
Calculating Gains and Losses
Cost Basis and Tax Rates
To calculate capital gains or losses, subtract your cost basis (purchase price plus fees) from the sale price. Short-term gains (assets held ≤1 year) are taxed at ordinary income rates (10-37%), while long-term gains (>1 year) face lower rates (0-20%). NFTs, classified as collectibles, may incur up to 28% tax. Use FIFO, LIFO, or HIFO methods, but per-wallet tracking is now required.
Reporting Crypto Income
Staking, Mining, and Airdrops
Income from staking, mining, or airdrops is taxed at fair market value upon receipt, reported on Schedule 1 or Schedule C for self-employment. Mining or DeFi node operations may trigger additional self-employment taxes. Use crypto tax software like Koinly or CoinLedger to automate fair market value calculations, especially for frequent transactions across multiple wallets.
Strategies to Minimize Taxes
Tax-Loss Harvesting and Donations
Offset gains with tax-loss harvesting by selling underperforming assets, with losses deductible up to $3,000 against ordinary income annually. Donating crypto to charities avoids capital gains tax and may qualify for deductions, requiring appraisals for gifts over $5,000. File by April 15, 2025 (June 15 for expats), or request an extension to October 15 using Form 4868.
