Crypto tax reporting guide: how to handle your gains and losses for the IRS.

Crypto Tax Reporting Basics for U.S. Traders

1. The IRS treats cryptocurrency as property, meaning every transaction involving digital assets may have tax implications. This includes buying goods, trading one crypto for another, or converting to fiat currency.

2. Each time you dispose of cryptocurrency—whether through sale, exchange, or use in a purchase—you must calculate the capital gain or loss based on the difference between your cost basis and the fair market value at the time of the transaction.
3. Accurate recordkeeping is essential. You should track the date of each transaction, the type of cryptocurrency involved, the amount, the fair market value in USD at the time, and the purpose of the transaction.
4. Failure to report crypto activity can trigger audits, penalties, or interest charges. Even small trades or transactions under $100 are subject to reporting requirements.
5. Taxpayers must answer the crypto question on Form 1040 each year, affirming whether they engaged in any cryptocurrency transactions during the tax year.

Calculating Gains and Losses Across Multiple Transactions

1. To determine gains or losses, identify your acquisition cost (including fees) and compare it with the proceeds received when disposing of the asset. For example, if you bought 1 BTC for $30,000 and later sold it for $45,000, your taxable gain is $15,000.

2. The holding period determines whether the gain is short-term or long-term. Assets held for one year or less generate short-term capital gains, taxed at ordinary income rates. Holding longer than one year qualifies for potentially lower long-term capital gains rates.
3. When trading one cryptocurrency for another, such as swapping ETH for SOL, this is considered a taxable event. You must report the USD value of the SOL received at the time of trade and recognize any gain or loss on the ETH disposed.
4. Specific identification, FIFO (first-in, first-out), and average cost are acceptable accounting methods. Using specific identification allows you to choose which units were sold, offering more control over tax outcomes if properly documented.
5. Tools like Koinly, CoinTracker, and CryptoTrader.Tax help automate calculations by syncing with exchanges and wallets, reducing manual errors and improving accuracy.

Reporting Cryptocurrency on IRS Forms

1. Most crypto gains and losses are reported on Form 8949, where each transaction is listed with details including date acquired, date sold, proceeds, cost basis, and gain or loss.

2. After completing Form 8949, the totals flow to Schedule D of Form 1040, summarizing short-term and long-term capital gains and losses.
3. If you receive crypto as payment for goods or services, the fair market value at receipt is treated as ordinary income and must be reported on Schedule C for self-employed individuals or included in wage income if received from an employer.
4. Mining and staking rewards are also taxable as income. The value at the time the coins are received must be reported, and any subsequent price increase when selling creates a capital gain.
5. Hard forks and airdrops are taxable upon receipt if you have dominion and control over the new tokens, based on their USD value at distribution.

Frequently Asked Questions

Do I need to report crypto if I didn’t sell?Yes, if you traded one crypto for another, used it to buy something, or received new tokens from a fork or airdrop, these are all reportable events even without converting to fiat.

What if I made losses—can I deduct them?Capital losses from crypto can offset other capital gains dollar for dollar. Up to $3,000 in excess losses can be deducted against ordinary income annually, with remaining losses carried forward to future years.

Are DeFi transactions taxable?Yes. Providing liquidity, earning yield, or receiving governance tokens through DeFi platforms typically triggers taxable events. Each action must be evaluated based on its economic substance and timing.

Can the IRS track my crypto transactions?Absolutely. Exchanges report user data to the IRS, blockchain analytics firms trace wallet activity, and the IRS issues John Doe summonses to obtain records from major platforms. Anonymity is limited in practice.