Cryptocurrency Tax Reporting Made Clear

From Bitcoin trades to DeFi yields and NFT sales, understand exactly how the IRS taxes every type of crypto transaction.

Cryptocurrency is treated as property by the IRS, not currency. This means every sale, exchange, or use of crypto to purchase goods or services is a taxable event that must be reported. With increased IRS enforcement and new broker reporting requirements, accurate crypto tax reporting is more important than ever.

Starting in 2025, centralized cryptocurrency exchanges must issue Form 1099-DA reporting your crypto transactions. This means the IRS will have detailed information about your trading activity and can easily cross-reference it against your tax return. Failing to report crypto income is increasingly risky.

The most challenging aspect of crypto taxation is tracking cost basis across multiple wallets, exchanges, and DeFi protocols. Each trade needs a cost basis to calculate gain or loss, and choosing the right accounting method (FIFO, LIFO, specific identification, or HIFO) can significantly impact your tax liability. Using specialized crypto tax software is strongly recommended for anyone with more than a handful of transactions.

Key Deductions & Credits

Capital Loss Harvesting

$1,000 - $10,000+

Sell losing crypto positions to offset gains from profitable trades. Unlike stocks, crypto is not subject to the wash sale rule (though legislation to change this is pending).

Long-Term Capital Gains Rate

$500 - $20,000+

Hold crypto for over one year to qualify for the 0%, 15%, or 20% long-term capital gains rate instead of ordinary income rates up to 37%.

Capital Loss Carryforward

$750 - $3,000+ per year

Net crypto losses exceeding your gains plus $3,000 carry forward indefinitely to future tax years, offsetting future gains.

Mining & Staking Expense Deduction

$500 - $10,000

If you mine crypto as a business, electricity costs, hardware depreciation, and hosting fees are deductible business expenses on Schedule C.

Charitable Donation of Crypto

$500 - $10,000+

Donate appreciated crypto held over one year to a qualifying charity. Deduct the full market value and avoid paying capital gains tax on the appreciation.

Forms You May Need

Form 8949 — Sales and Other Dispositions of Capital Assets

Schedule D (Form 1040) — Capital Gains and Losses

Form 1099-DA — Digital Asset Proceeds (new for 2025)

Schedule C (Form 1040) — Mining/Staking as Business Income

Schedule 1 (Form 1040) — Additional Income (staking rewards, airdrops)

Filing Tips

Use crypto tax software like CoinTracker, Koinly, or TokenTax to automatically calculate gains and losses across all your wallets and exchanges.
Choose your cost basis method strategically. HIFO (highest in, first out) typically minimizes current-year gains but must be applied consistently.
Keep records of all transactions including dates, amounts, fair market values, and the purpose of each transaction.
Report staking rewards, airdrops, and mining income as ordinary income at the fair market value on the date received.
Answer the digital asset question on Form 1040 honestly. Checking "No" when you had crypto transactions can be treated as a false statement.
Consider tax implications before converting between cryptocurrencies. A swap from Bitcoin to Ethereum is a taxable event, not a tax-free exchange.

Common Mistakes to Avoid

Not reporting crypto-to-crypto trades as taxable events. Swapping Bitcoin for Ethereum triggers capital gains tax on the Bitcoin.
Ignoring income from staking rewards, airdrops, and hard forks, which are taxable as ordinary income when received.
Using inconsistent cost basis methods across exchanges, which creates calculation errors and potential audit issues.
Forgetting to report NFT purchases and sales, which are treated as capital asset transactions.
Answering "No" to the Form 1040 digital asset question when you had taxable crypto activity during the year.

Recommended Software

TurboTax Premier integrates with major crypto tax calculators and exchanges to import transaction data, supports Form 8949 generation with thousands of transactions, and handles DeFi and NFT reporting.

Review TurboTax

FAQ

Is converting one cryptocurrency to another taxable?

Yes. Every crypto-to-crypto exchange is a taxable event. When you swap Bitcoin for Ethereum, you must calculate the gain or loss on the Bitcoin as if you sold it for its fair market value at the time of the exchange.

How are staking rewards taxed?

Staking rewards are taxed as ordinary income at their fair market value when you receive them. This becomes your cost basis for the received crypto. When you later sell the staking rewards, you pay capital gains tax on any additional appreciation.

Do I need to report crypto if I only held and did not sell?

If you only purchased and held crypto without selling, exchanging, or earning rewards, you do not have a taxable event to report. However, you should still answer "Yes" to the digital asset question on Form 1040 if you acquired crypto during the year.

Are crypto losses deductible?

Yes. Crypto capital losses offset capital gains dollar for dollar, plus up to $3,000 per year of ordinary income. Excess losses carry forward to future years. Unlike stocks, crypto is currently not subject to the wash sale rule, so you can sell at a loss and immediately repurchase.

How do I track cost basis for DeFi transactions?

DeFi transactions including liquidity pool deposits, yield farming, and token swaps all need cost basis tracking. Use specialized crypto tax software that connects to DeFi protocols via wallet address. Record the fair market value of tokens at the time of each interaction.