Cryptocurrency Tax FAQ

The IRS treats cryptocurrency as property, not currency, meaning every transaction can trigger a taxable event. Starting in 2024, the IRS requires all taxpayers to answer "yes" or "no" to a digital asset question on Form 1040 asking whether they received, sold, exchanged, or otherwise disposed of digital assets. You must report all cryptocurrency sales, exchanges, and dispositions on Form 8949 and Schedule D. Income from mining, staking, airdrops, or receiving crypto as payment must be reported as ordinary income on Schedule 1 or Schedule C if self-employed.

Centralized exchanges are required to issue Form 1099-DA (starting 2025) reporting your transactions to both you and the IRS. Beginning in 2024, the IRS implemented new broker reporting rules requiring exchanges to report cost basis and sales proceeds. Additionally, if you hold cryptocurrency in foreign accounts or on foreign exchanges exceeding $10,000, you may have FBAR reporting obligations. Failure to report cryptocurrency transactions can result in penalties ranging from accuracy penalties (20% of underpayment) to civil fraud penalties (75%) or even criminal prosecution for willful tax evasion.

Cost basis is the original value of your cryptocurrency for tax purposes, and calculating it correctly is essential for accurate gain/loss reporting. Your cost basis typically includes the purchase price plus any fees paid to acquire the crypto. For crypto received as income (mining, staking, airdrops, payment), your basis is the fair market value at the time of receipt. The IRS allows several cost basis methods: Specific Identification lets you choose which specific coins to sell (useful for tax optimization); FIFO (First In, First Out) assumes you sell your oldest coins first; LIFO (Last In, First Out) assumes you sell newest coins first; and HIFO (Highest In, First Out) sells highest-cost coins first to minimize gains.

Once you choose a method, you should apply it consistently. Tracking cost basis becomes complex with multiple purchases at different prices, transfers between wallets, hard forks, airdrops, and DeFi transactions. Many investors use cryptocurrency tax software to automatically track transactions across exchanges and calculate cost basis. Keep detailed records of all purchases including date, amount, price, and fees, as well as any transfers between wallets which do not trigger taxes but affect basis tracking.

DeFi (Decentralized Finance) transactions create complex tax situations that the IRS is still providing guidance on, but general principles apply. Swapping one token for another through a DEX (decentralized exchange) is a taxable event - you must calculate gain or loss based on the fair market value of what you received versus your cost basis in what you gave up. Providing liquidity to pools may trigger taxes in multiple ways: depositing tokens may be taxable if you receive LP tokens (treated as an exchange), and removing liquidity is definitely taxable.

Yield farming rewards, liquidity mining rewards, and governance token distributions are generally taxable as ordinary income when received, with your basis being the fair market value at receipt. Borrowing crypto (like on Aave or Compound) is not taxable, but using borrowed funds may trigger other tax events. Wrapping tokens (like ETH to WETH) is technically an exchange but some argue it should be non-taxable - IRS guidance is limited. Impermanent loss in liquidity pools may affect your cost basis calculations when you withdraw. Given DeFi complexity, maintaining detailed transaction records with timestamps and values is essential, and specialized DeFi tax software can help track these transactions.

Staking rewards are generally taxed as ordinary income when you receive them, though there is some legal uncertainty. Under current IRS guidance (Notice 2014-21 and Revenue Ruling 2023-14), when you receive new cryptocurrency through staking, you have taxable income equal to the fair market value of the rewards at the time they are received. This is similar to how mining income is treated. The income is reported on Schedule 1 (or Schedule C if staking is a trade or business) at ordinary income rates, which can be as high as 37% federally.

You must determine the fair market value at the moment of receipt, which can be challenging with frequent small rewards. Your cost basis in the staking rewards becomes the amount you reported as income. When you later sell the staking rewards, you'll owe capital gains tax on any appreciation above your basis. Some taxpayers have argued (including in the Jarrett case) that staking rewards should only be taxed when sold, similar to a baker's bread, but the IRS has not accepted this position broadly. If you stake through an exchange that issues 1099s, you'll receive documentation of your income. Self-staking requires careful record-keeping of all rewards received and their values.

Several cryptocurrency transactions are not taxable events under current IRS guidance. Buying cryptocurrency with fiat currency (USD, EUR, etc.) is not taxable - you're simply exchanging one form of property for another. Transferring crypto between your own wallets is not taxable, though you must track cost basis for future sales. Gifting cryptocurrency is generally not taxable to the giver (unless it exceeds annual gift tax exclusions of $18,000 per recipient in 2024) and creates no immediate tax for the recipient (who takes your cost basis).

Donating cryptocurrency to a qualified charity is not only not taxable but may provide a charitable deduction for the fair market value if held over one year. HODLing (holding without selling) creates no taxable event regardless of how much your crypto appreciates. Certain reorganizations like stock splits applied to token splits may not be taxable, though this is uncertain. Some argue that transferring crypto to DeFi protocols without receiving different tokens back may not be taxable, but this is unsettled. Importantly, even non-taxable transactions should be documented to maintain accurate cost basis records. Note that what appears non-taxable may trigger reporting requirements - large transfers still require answering the digital asset question on Form 1040.

The IRS addressed airdrops and hard forks in Revenue Ruling 2019-24, establishing that both create taxable income when you receive dominion and control over the new cryptocurrency. For airdrops, you have ordinary income equal to the fair market value of the tokens when you can access and transfer them, not when they're announced or deposited to your address if you can't yet access them. Your cost basis becomes the amount reported as income.

For hard forks, you have income when the new blockchain splits AND you receive the new coins AND you have the ability to dispose of them. Simply having coins on a chain that forks doesn't trigger income if your exchange doesn't support the new coin or you can't access it. The timing is crucial - if a fork happens in December but your exchange doesn't credit the new coins until January, the income is recognized in January. For unsolicited airdrops of worthless tokens (dust attacks), some taxpayers argue there's no income because the tokens have no value, but documentation is important. Airdrops received for taking action (signing up, participating in a protocol) may be treated differently - potentially as compensation if services were provided. Track the fair market value at receipt for all airdrops and fork coins to establish your cost basis.

Cryptocurrency losses can offset gains and, to a limited extent, other income under capital loss rules. First, your crypto losses offset any crypto gains dollar-for-dollar. Remaining losses then offset other capital gains (stocks, real estate, etc.). If you still have excess capital losses, you can deduct up to $3,000 per year ($1,500 if married filing separately) against ordinary income like wages. Losses beyond $3,000 carry forward indefinitely to future tax years.

This creates opportunities for tax-loss harvesting - strategically selling crypto at a loss to realize the tax benefit, then repurchasing. Unlike stocks, cryptocurrency is not subject to wash sale rules (which prevent claiming a loss if you repurchase substantially identical securities within 30 days), though Congress has proposed extending wash sale rules to crypto. However, you must have actually disposed of the crypto to claim the loss - unrealized losses don't count. If your crypto becomes completely worthless (exchange bankruptcy, rug pull), you may be able to claim a worthlessness deduction, though proving worthlessness requires documentation. Use our capital gains tax calculator to model different scenarios for harvesting losses against gains and optimizing your tax position.

Maintaining comprehensive cryptocurrency records is essential for accurate tax reporting and audit defense. For every purchase, record the date, amount of crypto acquired, price in USD (or equivalent), exchange or platform used, and any fees paid. For sales and exchanges, record the date, amount disposed of, proceeds received, which specific lots were sold (for specific identification), and fees. For income events (staking, mining, airdrops), record the date and time received, amount of crypto, fair market value at receipt, and source.

Track all wallet transfers including from/to addresses, dates, amounts, and transaction hashes - while transfers aren't taxable, losing this thread makes cost basis tracking impossible. Export transaction histories from all exchanges before you close accounts, as data may become inaccessible. Keep records indefinitely - the IRS generally has three years to audit, but this extends to six years for substantial understatements and indefinitely for fraud. Consider using cryptocurrency tax software that connects to exchanges and wallets to automatically track and calculate your tax obligations. Store records securely with backups, including screenshots of exchange balances and wallet holdings at year-end. Documentation of cost basis is particularly important since the burden of proof falls on you if the IRS questions your basis.