Overview

The IRS treats cryptocurrency as property, not currency, so most crypto transactions create taxable events (IRS Notice 2014‑21; IRS Cryptocurrency FAQs). That means selling crypto for cash, trading one coin for another, using crypto to buy goods or services, and receiving crypto as compensation can trigger capital gains or ordinary income that must be reported on your federal return.

Key filing steps and forms

  • Form 8949 and Schedule D — Report capital gains and losses from sales or exchanges of crypto (dates, proceeds, cost basis, gain/loss) on Form 8949 and carry totals to Schedule D (see Form 8949 instructions, IRS).
  • Form 1040 line question — The 1040 asks whether you received, sold, exchanged, or otherwise disposed of virtual currency during the year; answer truthfully.
  • Schedule 1 or Schedule C — Crypto received as nonemployee compensation (freelance, goods/services) is ordinary income. If you’re operating as a business or trader, report on Schedule C and consider self‑employment tax.
  • Other reporting — Mining, staking rewards, and some airdrops are ordinary income at the fair market value when received; check specific guidance (IRS crypto FAQs and Publication 525/550 for general income/basis rules).

Common filing scenarios

  • Selling for cash: Proceeds minus cost basis = capital gain or loss; short‑ vs long‑term depends on holding period.
  • Crypto‑to‑crypto trades: Treated as a sale of the asset you disposed of, so you report gain/loss based on fair market value at the time of trade.
  • Spending crypto for goods/services: The fair market value of the crypto at the transaction time is the amount realized; you may have gain/loss.
  • Receiving crypto as payment: Report the fair market value as ordinary income when received; basis equals that amount.

Recordkeeping and calculating basis

Accurate records are essential: dates acquired, dates sold, acquisition cost, proceeds, transaction fees, and the USD value at each transaction time. Many exchanges give transaction histories, but these often require cleanup (missing timestamps or incorrect valuations). Tax software designed for crypto can import exchange histories, calculate gains by selected method (FIFO, specific identification if supported), and produce Form 8949 outputs. In my practice, clients who reconcile exchange CSVs with wallet exports avoid the largest IRS notice issues.

Important tax-law notes

  • Like‑kind exchanges: Since the Tax Cuts and Jobs Act of 2017 limited like‑kind exchanges to real property, crypto-to-crypto trades are not eligible for nonrecognition treatment and are taxable events.
  • Cost basis rules: If you received crypto as income, your basis is the income amount reported. If you inherited crypto, different basis rules apply (step‑up in many cases).

Common mistakes and audit triggers

  • Failing to report each taxable disposition (crypto‑to‑crypto trades and spending are often missed).
  • Poor documentation of basis and timestamps.
  • Treating crypto as tax‑free until cashed out — realized gain occurs on disposition, not only on conversion to cash.

When to amend a return

If you discover unreported crypto transactions, file an amended return (Form 1040‑X) to correct income and gains. Many taxpayers amend voluntarily before receiving an IRS notice; doing so reduces penalties and interest exposure in many cases (see FinHelp’s guide: When to Amend a Return for Unreported Cryptocurrency Sales).

Practical tips

  1. Reconcile exchange statements and wallets monthly. Small mismatches compound into large exposure.
  2. Use reputable crypto tax software to aggregate trades, cost basis, and fees — but review outputs before filing.
  3. Separate investment activity from business activity: if you’re running a trading business, work with a CPA to evaluate Schedule C vs. investor reporting.
  4. Keep records for at least three years from the date you file, and longer if you underreported income by 25% or more.

Professional guidance and tools

If you have frequent trades, staking rewards, liquidity‑pool activity, or DeFi transactions, consult a tax professional with crypto experience. I recommend reading FinHelp’s deeper explainers for related issues: How the IRS Treats Cryptocurrency: Reporting, Valuation, and Compliance (internal resource) and When to Amend a Return for Unreported Cryptocurrency Sales (internal resource).

Authoritative sources

Internal resources

Professional disclaimer

This article is educational and not personalized tax advice. Tax rules change and individual circumstances vary; consult a qualified CPA or tax attorney for advice tailored to your situation.