Background

The IRS formally classified cryptocurrency as property in Notice 2014‑21, meaning digital assets are not treated like foreign currency for income tax purposes. Since then the IRS has reinforced reporting obligations (for example, the virtual currency FAQ on IRS.gov) and added enforcement focus on crypto transactions.

How taxable events work

Because the IRS treats crypto as property, each transaction can be a taxable event:

  • Selling crypto for fiat (USD) realizes gain or loss measured from your cost basis.
  • Trading one crypto for another is a taxable disposition — you recognize gain or loss based on the fair market value (FMV) of the crypto received.
  • Using crypto to purchase goods or services is treated as a sale of property (FMV of crypto at the time of the transaction).
  • Mining, staking rewards, airdrops and some DeFi yields are generally treated as ordinary income when received and may also create a later capital gain/loss when sold.

In my practice advising taxpayers on digital‑asset reporting, I routinely see two recurring issues: incomplete basis records across multiple wallets and failure to treat swaps between tokens as taxable trades.

Valuation and recordkeeping

  • Use a reliable exchange or index rate to determine FMV at the exact date and time of each transaction. Keep screenshots or exportable reports.
  • Track cost basis (purchase price plus fees) and chain transfers that affect basis (e.g., transfers between your wallets don’t change basis but must be documented).
  • Cryptocurrency tax‑tracking software can consolidate wallets and compute realized/unrealized gains — but always verify the software’s exchange rates and mappings.

Reporting on tax forms

  • Sales and trades: report gains/losses on Schedule D and Form 8949 (capital gains/losses).
  • Ordinary income (mining, staking, employer payments): report as income on Schedule 1 or Schedule C if self‑employment applies; payroll reporting is required when crypto is paid as wages.
  • Exchanges may issue Form 1099 series; however, not all platforms provide accurate or complete 1099s — taxpayers remain responsible for accurate reporting.

See FinHelp’s guide on Cryptocurrency Tax Reporting: Gains, Losses, and Compliance for form‑level examples and common reporting workflows.

Real‑world examples

  • Investor: Bought 1 BTC at $5,000, later sold at $10,000 → $5,000 capital gain. If held >1 year, long‑term capital gains rates apply.
  • Business: A small merchant accepting crypto records gross receipts equal to the USD FMV when received and separately tracks any later gain or loss when the crypto is converted to USD.
  • Miner: Mining rewards received are reported as ordinary income at FMV when earned and may also produce a capital gain/loss on later sale.

Who must comply

Any U.S. taxpayer who buys, sells, trades, receives or spends cryptocurrency must consider taxation — from hobbyists and investors to businesses and developers. Casual use does not exempt reporting when a transaction produces a gain, income, or deductible expense.

Practical tips (professional best practices)

  1. Record everything at transaction time: date, time, amount, FMV, purpose, and involved addresses.
  2. Reconcile exchange reports with on‑chain records and wallet exports.
  3. Use specialized tax software and keep raw export files for audit support.
  4. When in doubt, consult a CPA or tax attorney experienced in virtual currency tax issues.

For staking‑specific reporting, review our detailed page on Reporting Cryptocurrency Staking Rewards on Your Federal Return.

Common mistakes and how to avoid them

  • Assuming small transactions are non‑reportable — gains of any size must be reported.
  • Relying solely on exchange 1099s — many platforms underreport or misclassify transactions.
  • Not tracking cost basis across multiple deposits and wallet transfers.
  • Ignoring taxable income from airdrops, staking rewards or employer‑paid crypto.

If you discover an error

If you find unreported crypto income or gains on a prior return, consider amending using Form 1040‑X. See our walkthrough: When and How to File Form 1040‑X for Cryptocurrency Errors.

FAQ (brief)

  • Do I report crypto losses? Yes — losses offset gains and (up to limits) reduce taxable income. Report on Form 8949 and Schedule D.
  • Are airdrops taxable? Typically treated as ordinary income when you have dominion and control; keep documentation.
  • Is transferring between my wallets taxable? No gain/loss if you control both wallets, but document the transfer to support basis.

Professional disclaimer

This article is educational and not individualized tax advice. Rules around virtual currency continue to evolve; consult a qualified tax professional for your specific facts and the latest IRS guidance (see IRS virtual currency FAQs).

Authoritative sources

  • IRS Notice 2014‑21 (virtual currency as property) — IRS.gov
  • IRS Virtual Currency Guidance and FAQs — https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies
  • FinHelp related guides: “Cryptocurrency Tax Reporting: Gains, Losses, and Compliance”, “Reporting Cryptocurrency Staking Rewards on Your Federal Return”, “When and How to File Form 1040‑X for Cryptocurrency Errors”