Cryptocurrency Tax Reporting Guide 2025

Property Treatment Under IRS Notice 2014-21

In 2014, the IRS issued Notice 2014-21, establishing the foundational tax treatment for cryptocurrency in the United States. The core principle: cryptocurrency is treated as property, not currency, for federal tax purposes.

What Property Treatment Means

Property classification has significant implications for crypto holders:

• Every transaction is potentially taxable: Selling crypto for USD, exchanging one crypto for another, using crypto to buy goods/services, and receiving crypto as payment all trigger tax reporting obligations
• Capital gains rules apply: Gains and losses are characterized as capital (short-term or long-term) based on holding period
• Basis tracking required: You must track the cost basis of each unit of cryptocurrency to calculate gain or loss on disposition
• No like-kind exchange treatment: After 2017, Section 1031 like-kind exchange treatment does not apply to cryptocurrency-to-cryptocurrency exchanges
• Ordinary income for certain receipts: Crypto received as payment for services, mining rewards, staking rewards, and airdrops may be ordinary income at fair market value when received

IRS Digital Asset Question

Starting with the 2019 tax year, the IRS added a digital asset question to Form 1040. For tax year 2024 and beyond, the question appears prominently on page 1:

"At any time during 2024, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?"

You must answer this question truthfully. Checking "No" when you engaged in digital asset transactions can result in penalties for filing a false or fraudulent return.

Capital Gains Reporting Requirements

Most cryptocurrency transactions generate capital gains or losses. Understanding how to properly report these gains is critical for compliance.

Short-Term vs. Long-Term Capital Gains

The holding period determines whether a gain or loss is short-term or long-term:

• Short-Term Capital Gains: Assets held for one year or less. Taxed at ordinary income rates (up to 37% for 2024/2025)
• Long-Term Capital Gains: Assets held for more than one year. Taxed at preferential rates (0%, 15%, or 20% depending on income level)

Calculating Gain or Loss

For each cryptocurrency disposition, calculate gain or loss using the formula:

Gain/Loss = Fair Market Value Received - Adjusted Cost Basis

Cost Basis Tracking Methods

Accurate cost basis tracking is essential for correct tax reporting. The IRS allows several methods for determining which specific units of cryptocurrency you sold when you dispose of only a portion of your holdings.

What's Included in Cost Basis?

Your cost basis includes:

• Purchase price paid for the cryptocurrency
• Exchange fees and transaction fees paid to acquire the crypto
• Gas fees paid on blockchain networks (e.g., Ethereum gas fees for acquiring tokens)
• For crypto received as ordinary income (mining, staking, airdrops), the fair market value at the time of receipt becomes your basis

DeFi Staking & Lending Taxation

Decentralized finance (DeFi) activities create complex tax issues. The IRS has provided limited guidance, but tax professionals have developed working frameworks based on existing law.

Staking Rewards

In Revenue Ruling 2023-14, the IRS clarified that tokens received as staking rewards are taxable as ordinary income in the year you gain dominion and control over them.

• When taxable: When you gain the ability to sell, exchange, or otherwise dispose of the staking rewards
• Amount of income: Fair market value of the tokens at the time you receive dominion and control
• Character: Ordinary income (not capital gain), reported on Schedule 1 as "Other Income"
• Basis: Your basis in the staking rewards equals the amount you included in income; subsequent sale generates capital gain/loss

DeFi Lending

Lending cryptocurrency through DeFi protocols (Aave, Compound, etc.) creates several potential taxable events:

Liquidity Pool (LP) Participation

Providing liquidity to decentralized exchanges (Uniswap, SushiSwap, etc.) involves depositing two assets into a pool and receiving LP tokens in return. Tax treatment:

• Depositing assets: Conservative treatment is that this is a taxable exchange (you're disposing of two tokens and receiving LP tokens). Calculate gain/loss on each token deposited.
• Receiving LP tokens: Your basis in LP tokens equals the FMV of the assets you deposited (which should equal the amount of gain you recognized)
• LP fees/rewards: Ordinary income when credited to your position, measured by the increase in your LP token redemption value or any separate reward tokens distributed
• Withdrawing from pool: Disposition of LP tokens; calculate gain/loss based on FMV of tokens received vs. basis in LP tokens redeemed

Yield Farming & Reward Tokens

Yield farming—providing liquidity or staking in exchange for reward tokens—generates ordinary income:

• Reward tokens are ordinary income at FMV when you gain control
• Your basis in the reward tokens equals the amount included in income
• Subsequent sale of reward tokens generates capital gain/loss
• Some protocols auto-compound rewards; each compounding event may be a taxable distribution followed by re-staking

NFT Sales Taxation

Non-fungible tokens (NFTs) are treated as property for tax purposes, similar to other crypto assets. However, NFTs may be subject to special rules depending on their characteristics.

Buying an NFT

Purchasing an NFT with cryptocurrency is a taxable exchange:

• You dispose of crypto (triggering capital gain/loss)
• Your basis in the NFT equals the FMV of the crypto you used to purchase it
• Gas fees paid to mint or purchase NFTs are added to your basis

Selling an NFT

Selling an NFT generates capital gain or loss:

• Calculate gain/loss as FMV received minus your cost basis in the NFT
• Holding period determines whether gain is short-term or long-term
• Royalties received on secondary sales are ordinary income (see below)

Collectibles Tax Rate (28% Maximum)

Section 1(h)(5) imposes a maximum 28% tax rate on gains from "collectibles." The IRS has not formally ruled on whether NFTs are collectibles, but many tax professionals believe NFTs representing digital art, trading cards, or similar collectible items may be subject to the 28% rate rather than the standard 20% long-term capital gains rate.

NFT Royalties

Many NFT smart contracts include royalty provisions that pay the original creator a percentage of secondary sales. Tax treatment:

• For creators: Royalties are ordinary income when received (similar to traditional royalty income)
• Reporting: Schedule C if you're in the business of creating NFTs; Schedule 1 (Other Income) if not a business
• Self-employment tax: May apply if you're engaged in a trade or business of creating NFTs

Creating/Minting NFTs

If you create and mint your own NFT:

• Minting costs (gas fees): Capitalized as basis in the NFT (not immediately deductible)
• Sale proceeds: If you're an artist/creator engaged in a trade or business, sales may be ordinary income on Schedule C; if not a business, likely capital gain
• Hobby vs. business: Critical determination for creators—business status allows deductions but triggers self-employment tax; hobby income is still taxable but deductions are severely limited after tax reform

Mining Income Reporting

Cryptocurrency mining generates ordinary income for tax purposes. The IRS treats mined coins as income at the time you successfully mine them and gain ownership.

When Mining Income is Recognized

You have taxable income when you receive mining rewards:

• Timing: When the mined cryptocurrency is credited to your wallet and you have dominion and control
• Amount: Fair market value of the cryptocurrency on the date and time you received it
• Character: Ordinary income (not capital gain)
• Basis: Your basis in the mined coins equals the amount you included in income

Business vs. Hobby Mining

Whether your mining activity is a business or hobby has significant tax implications:

Deductible Mining Expenses (If Business)

If your mining qualifies as a business, you can deduct:

• Mining equipment: Depreciated over useful life (typically 5 years under MACRS) or potentially fully deducted under Section 179 or bonus depreciation
• Electricity costs: Directly deductible as a business expense
• Internet and hosting fees: Deductible
• Repairs and maintenance: Deductible
• Mining pool fees: Deductible
• Home office: If you use a dedicated space for mining, you may qualify for home office deduction
• Professional fees: Accounting and tax preparation fees related to mining business

Solo Mining vs. Pool Mining

Tax treatment is the same whether you mine solo or in a pool:

• Pool mining rewards are income when credited to your account (even before withdrawal)
• Pool fees reduce your gross income (or are deductible expenses if you report gross rewards)
• Report the net amount received as income

Subsequent Sale of Mined Crypto

When you later sell mined cryptocurrency:

• Your basis equals the amount you previously included in income when you mined it
• Calculate capital gain/loss as: Sale Price - Basis
• Holding period begins on the date you mined it (and included it in income)
• Short-term vs. long-term treatment depends on holding period

Airdrops & Hard Forks

The IRS issued guidance in Revenue Ruling 2019-24 addressing the tax treatment of hard forks and airdrops.

Hard Forks

A hard fork occurs when a cryptocurrency undergoes a protocol change that results in a permanent divergence from the legacy blockchain, creating a new cryptocurrency.

IRS Position (Rev. Rul. 2019-24):

• A hard fork alone does not result in income if you do not receive new cryptocurrency
• If a hard fork is followed by an airdrop (you receive units of the new cryptocurrency), you have ordinary income when you gain dominion and control over the new cryptocurrency

Airdrops

Airdrops—free distributions of cryptocurrency, often for marketing purposes—are taxable as ordinary income when you receive dominion and control over the tokens.

When Taxable:

• When the tokens are credited to your wallet or account AND you have the ability to transfer, sell, exchange, or otherwise dispose of them
• Not when announced or promised, but when you actually gain control

Amount of Income:

• Fair market value of the tokens at the date and time you gained dominion and control
• If no established market exists, determining FMV can be complex—may need to wait until a market develops or use other valuation methods

Basis:

• Your basis in airdropped tokens equals the amount you included in income
• Holding period begins on the date you received them

Crypto Earned Through Promotion or Bounties

Receiving cryptocurrency as compensation for services (social media promotion, bug bounties, testnet participation, etc.) is ordinary income:

• Amount: FMV of crypto received when you gain control
• Reporting: Schedule C if business activity; Schedule 1 (Line 8z) if not a business
• Self-employment tax may apply if you're engaged in a trade or business
• Payor may issue Form 1099-NEC if they paid you $600 or more

Form 8949 & Schedule D Reporting

Cryptocurrency capital gains and losses are reported on Form 8949 (Sales and Other Dispositions of Capital Assets) and summarized on Schedule D.

Form 8949 Structure

Form 8949 has two parts:

• Part I: Short-term capital gains and losses (assets held one year or less)
• Part II: Long-term capital gains and losses (assets held more than one year)

Each part has three checkboxes indicating which transactions you're reporting:

• Box A (short-term) / Box D (long-term): Transactions reported to you on Form 1099-B showing basis was reported to the IRS
• Box B (short-term) / Box E (long-term): Transactions reported to you on Form 1099-B showing basis was NOT reported to the IRS
• Box C (short-term) / Box F (long-term): Transactions NOT reported to you on Form 1099-B

Information Required for Each Transaction

For each cryptocurrency sale or exchange, report on Form 8949:

• Column (a): Description of property (e.g., "1.5 Bitcoin")
• Column (b): Date acquired (MM/DD/YYYY)
• Column (c): Date sold or disposed (MM/DD/YYYY)
• Column (d): Proceeds (sale price or FMV of what you received)
• Column (e): Cost basis (what you paid, including fees)
• Column (h): Gain or loss (column (d) minus column (e))

Schedule D Summary

After completing Form 8949, transfer the totals to Schedule D:

• Schedule D, Part I summarizes short-term capital gains and losses
• Schedule D, Part II summarizes long-term capital gains and losses
• Schedule D calculates your net capital gain or loss
• Net capital gain flows to Form 1040, Schedule 1 or directly to Form 1040

Capital Loss Limitations

If your capital losses exceed your capital gains:

• You can deduct up to $3,000 of net capital losses against ordinary income ($1,500 if married filing separately)
• Excess losses carry forward indefinitely to future tax years
• Carryforward losses maintain their character (short-term or long-term)

Crypto Tax Software Integration

Given the complexity and volume of crypto transactions, most taxpayers use crypto tax software to generate Form 8949:

• Software imports transaction history from exchanges and wallets
• Automatically calculates gain/loss for each transaction
• Generates completed Form 8949 ready to attach to your return
• Popular options: CoinTracker, TokenTax, Koinly, CoinLedger, TaxBit, ZenLedger

Wash Sale Rules (2025 and Beyond)

The wash sale rule (Section 1091) prevents taxpayers from claiming a loss on the sale of securities if they purchase "substantially identical" securities within 30 days before or after the sale (61-day window total).

Current Status: Wash Sale Rule Does NOT Apply to Crypto (Yet)

As of tax year 2024, the wash sale rule does NOT apply to cryptocurrency because crypto is classified as property, not securities. This creates a tax planning opportunity:

• You can sell cryptocurrency at a loss to harvest the tax loss
• Immediately repurchase the same cryptocurrency (even the same day)
• Claim the loss on your current year return
• Maintain your investment position without waiting 31 days

Proposed Legislative Changes

Multiple legislative proposals have sought to extend wash sale rules to cryptocurrency and other digital assets:

• Biden Administration Proposals: The administration's budget proposals for fiscal years 2023, 2024, and 2025 have included provisions to extend wash sale rules to digital assets
• Congressional Bills: Various bills have been introduced (but not yet passed) that would subject crypto to wash sale rules
• Effective Date Uncertainty: If enacted, wash sale rules for crypto would likely apply prospectively (to sales after the effective date)

What Wash Sale Rule Would Mean for Crypto

If wash sale rules are extended to cryptocurrency:

• Selling crypto at a loss and repurchasing within 30 days would trigger wash sale treatment
• The loss would be disallowed for current year tax purposes
• The disallowed loss would be added to the basis of the repurchased crypto (deferring the loss)
• The holding period of the repurchased crypto would include the holding period of the sold crypto
• Tax loss harvesting would require waiting 31 days before repurchasing (same as stocks)

Constructive Sales and Short Sales

Even without wash sale rules, constructive sale rules under Section 1259 may apply to certain crypto hedging strategies. If you hold a cryptocurrency position and enter into a short sale, offsetting notional principal contract, or other transaction that substantially eliminates your risk of loss and opportunity for gain, you may trigger a constructive sale (taxable event) even without an actual disposition.

Crypto Tax Software Solutions

Managing cryptocurrency tax reporting manually is impractical for most investors. Specialized crypto tax software has become essential.

What Crypto Tax Software Does

• Transaction Import: Connects to exchanges, wallets, and DeFi protocols via API or CSV upload to import transaction history
• Cost Basis Tracking: Tracks cost basis for every transaction using your selected accounting method (FIFO, LIFO, HIFO, specific ID)
• Gain/Loss Calculation: Automatically calculates capital gains and losses for every disposition
• Income Recognition: Identifies and values staking rewards, mining income, airdrops, and other ordinary income events
• DeFi Categorization: Attempts to classify complex DeFi transactions (with varying degrees of accuracy)
• Tax Form Generation: Produces completed Form 8949, Schedule D, and income summaries ready for filing
• Loss Harvesting: Identifies unrealized losses for tax loss harvesting opportunities
• Audit Trail: Maintains detailed records to support your tax reporting in case of IRS examination

Leading Crypto Tax Platforms

Limitations of Crypto Tax Software

While powerful, crypto tax software has limitations:

• DeFi Complexity: Software may misclassify complex DeFi transactions (LP deposits, flash loans, protocol-specific mechanics)
• Manual Review Required: Always review categorizations—software isn't perfect
• Missing Transactions: If you used many wallets or obscure protocols, some transactions may not import properly
• NFT Limitations: NFT cost basis tracking is improving but still less robust than fungible token tracking
• Cost Basis Method Constraints: Some software has limited support for specific identification or HIFO methods
• No Legal Advice: Software provides calculations, not tax advice on complex situations

Year-End Tax Reporting Checklist

Cost Basis Methods Deep Dive

Specific Identification: Maximum Control

Specific identification gives you the most tax planning flexibility but requires meticulous record-keeping.

Requirements for Specific Identification:

• At the time of sale, you must specifically identify which units you're selling
• Identification must be made by the settlement date of the sale (not after)
• You must maintain adequate records demonstrating the specific identification
• Documentation should include: date and time acquired, amount acquired, cost basis, wallet address or account, and which specific units are being sold

How to Implement:

1. Maintain detailed records of every crypto acquisition (date, time, amount, cost basis, location)
2. When selling, before executing the transaction, document which specific units you're selling (e.g., "Selling 2 BTC from the 5 BTC purchased on 3/15/2023 at $28,000/BTC")
3. Maintain this documentation in your tax records
4. Use crypto tax software that supports specific identification and allows you to manually select lots

FIFO: The Default Method

If you don't use specific identification, the IRS default is FIFO (First In, First Out). Your oldest units are deemed sold first.

Advantages:

• Simple to implement and explain
• IRS default, so defensible on audit
• Tends to generate long-term capital gains (if you've held for more than a year)

Disadvantages:

• In a rising market, your oldest units likely have the lowest basis, maximizing taxable gains
• Less flexibility for tax planning
• May not optimize for current-year tax situation

HIFO: Minimize Current Gains

Highest In, First Out (HIFO) is a form of specific identification where you always sell the units with the highest cost basis first.

Advantages:

• Minimizes current-year taxable gains (or maximizes losses)
• Useful for managing tax liability in high-income years
• Can defer gains to future years

Disadvantages:

• Requires specific identification documentation
• Depletes high-basis inventory, leaving only low-basis units for future
• May generate short-term gains if highest-basis units are recent acquisitions

LIFO: Last In, First Out

LIFO assumes your most recently acquired units are sold first.

When Useful:

• If you've been accumulating crypto and want to minimize short-term gains
• Can be simpler than HIFO while still offering some tax benefit

Considerations:

• Not the IRS default—you must affirmatively elect it
• May generate short-term gains if recent acquisitions have appreciated
• Less common than FIFO or specific identification

Detailed Form 8949 Filing Guide

Step 1: Separate Short-Term and Long-Term Transactions

Review all your crypto dispositions and separate them:

• Short-term: Cryptocurrency held for one year or less (365 days or fewer)
• Long-term: Cryptocurrency held for more than one year (366 days or more)

Step 2: Determine Which Box to Check

For most cryptocurrency transactions in 2024 and prior years, you'll check:

• Box C (for short-term transactions): Transactions not reported to you on Form 1099-B
• Box F (for long-term transactions): Transactions not reported to you on Form 1099-B

Step 3: Complete Columns for Each Transaction

Column (a) - Description of Property:

• Describe what you sold (e.g., "1.5 Bitcoin" or "50 Ethereum")
• Be specific about the cryptocurrency and amount

Column (b) - Date Acquired:

• Enter the date you acquired the cryptocurrency (MM/DD/YYYY)
• If you cannot determine the exact date (e.g., airdrops, old records lost), enter "VARIOUS" and use the earliest possible acquisition date or a reasonable estimate

Column (c) - Date Sold or Disposed:

• Enter the date of the sale or exchange (MM/DD/YYYY)
• This is typically the date the transaction was confirmed on the blockchain

Column (d) - Proceeds:

• For sales to USD: Enter the amount of USD received (or amount that would have been received, before fees)
• For crypto-to-crypto: Enter the fair market value (in USD) of the cryptocurrency you received
• For purchases of goods/services: Enter the fair market value of what you purchased
• Do not reduce proceeds by selling fees (those are added to basis instead)

Column (e) - Cost or Other Basis:

• Enter your cost basis in the cryptocurrency you disposed of
• Include: original purchase price + acquisition fees + gas fees to acquire
• Add selling fees to basis here (in Column (g) with code "E" in Column (f))

Column (f) - Code (if applicable):

• Use code "E" if you have adjustments in Column (g) for selling expenses
• Most crypto transactions will not use this column

Column (g) - Adjustment Amount:

• If you use code "E" in Column (f), enter selling fees here as a positive number
• These fees increase your basis, reducing gain (or increasing loss)

Column (h) - Gain or Loss:

• Calculate: Column (d) minus Column (e) minus Column (g) (if applicable)
• Enter as positive (gain) or negative (loss)

Step 4: Attach Form 8949 to Your Return

If you have many transactions:

• Use additional Forms 8949 as needed (software will generate multiple pages)
• Alternatively, you may attach a statement in the same format as Form 8949 if you have hundreds of transactions
• Crypto tax software typically generates a complete Form 8949 (or substitute statement) ready to file

Step 5: Transfer Totals to Schedule D

After completing all Forms 8949:

• Total all short-term transactions and enter on Schedule D, Part I, Line 1, 2, or 3 (depending on which box you checked)
• Total all long-term transactions and enter on Schedule D, Part II, Line 8, 9, or 10 (depending on which box you checked)
• Complete Schedule D to calculate your overall capital gain or loss