How Cryptocurrency Transactions Are Reported on Tax Forms

Quick answer

Cryptocurrency transactions are reported as property transactions on your federal tax return: use Form 8949 to report individual sales/exchanges, transfer totals to Schedule D for capital gains/losses, and include totals on Form 1040. Transactions that generate ordinary income (for example, mining rewards, staking income, or airdrops) are reported as income elsewhere on Form 1040 and possibly Schedule 1. (See IRS guidance: Notice 2014‑21 and the IRS FAQ on virtual currency.)

Why this matters now

Since the IRS classified virtual currency as property in 2014 (IRS Notice 2014‑21), crypto activity has been taxable when it results in gain, loss, or income. The IRS added a virtual-currency question to Form 1040 to improve compliance, and enforcement has increased. In my practice, I often see clients who underestimated tax on seemingly small transactions — small trades, payments, or airdrops can generate taxable income or gains that add up.

Which IRS forms are used and when

• Form 8949, Sales and Other Dispositions of Capital Assets: report each crypto sale, exchange, or disposition (including using crypto to buy goods or services). Enter acquisition date, sale date, proceeds (fair market value in USD), cost basis, and gain or loss. (See Form 8949 guidance on the IRS site: https://www.irs.gov/forms-pubs/about-form-8949.)

• Schedule D (Form 1040), Capital Gains and Losses: summarize totals from Form 8949 into short-term and long-term capital gains/losses for the year. (See Schedule D: https://finhelp.io/glossary/schedule-d-form-1040-capital-gains-and-losses/ and IRS page.)

• Form 1040: report total capital gain or loss and answer the virtual-currency question on the top of the return. Ordinary income from mining, staking, airdrops, or compensation paid in crypto is reported as other income or wages (Schedule 1 or Form W-2 where applicable).

• Information returns (Forms 1099 series): exchanges and payment processors may issue Form 1099‑B, 1099‑K, or 1099‑MISC/NEC. These forms are informational; reconcile them to your own records. Exchanges’ reporting practices vary.

How to calculate cost basis and gain

1. Establish cost basis for each unit of crypto (amount paid plus fees, in USD at purchase time). If you acquired crypto from mining, staking, or as payment, basis equals the fair market value (FMV) in USD when you received it; that FMV is reportable as ordinary income.

2. When you sell, exchange, or spend crypto, compute proceeds as the FMV of the fiat or property received at the transaction time.

3. Gain or loss = proceeds − cost basis. If you held the asset for more than one year, it’s a long‑term capital gain or loss; otherwise, short‑term (taxed at ordinary rates).

4. For exchanges (crypto for crypto) treat the transfer as a sale of the asset you gave up and a purchase of the asset you received — both sides are taxable events.

Example: You bought 1 BTC for $4,000 (basis). You later used that 1 BTC to buy a car when BTC was worth $50,000. Your gain is $46,000 and must be reported on Form 8949 and Schedule D. If you received the car as business income instead of personal purchase, there are additional reporting nuances.

Special situations and how to report them

• Mining, staking rewards, airdrops, and hard forks: generally treated as ordinary income at FMV when you gain dominion and control. That FMV becomes your basis. (IRS FAQ on virtual currency: https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-virtual-currency-transactions)

• Payments in crypto (for goods, services, wages): treated as ordinary income equal to the FMV at receipt and reported on Form 1040 (and Form W‑2 for employees).

• Gifts and inheritances: gifts are not taxable to the recipient, but the donor may have gift-tax reporting obligations. For inherited crypto, the beneficiary usually receives a stepped-up basis (check estate rules). Consult a tax advisor for complex estate matters.

• Hard forks & airdrops: the IRS distinguishes between receipt of new coins (income) and later disposition (capital gain/loss on sale). Document dates and FMV.

• Non-fungible tokens (NFTs): treated similarly to other crypto, but valuation and character (collectible vs investment) can change tax treatment; consult a specialist for high‑value NFTs.

Recordkeeping: what to track and how long

Keep transaction-level records including:

• Date acquired and date sold
• FMV in USD at acquisition and at disposition
• Transaction type (buy, sell, exchange, gift, mining, airdrop)
• Fees paid (they adjust basis or proceeds in many cases)
• Wallet addresses and exchange statements

Maintain records for at least three years after filing (longer if you underreported income or have unfiled years). If you can’t find original records, reconstruct them using exchange histories, blockchain explorers, bank statements, and third-party tools.

I regularly advise clients to export CSV transaction histories from every exchange and wallet and keep a running master ledger. Using a reputable crypto tax tool can simplify this and help populate Form 8949.

Common mistakes I see (and how to avoid them)

• Treating purchases with fiat as taxable events: buying crypto with USD is not taxable; failing to track basis is the bigger risk.
• Ignoring small or frequent transactions: micro‑payments and airdrops accumulate taxable events.
• Not reconciling exchange 1099s: some exchanges issue 1099s that don’t match your calculations; always reconcile and correct errors with the exchange and on your return.
• Assuming wash-sale rules apply: as of 2025, wash-sale rules that disallow losses on substantially identical stock sales do not explicitly apply to crypto — the IRS hasn’t adopted a rule extending wash‑sale to virtual currency. This is an active area of debate and possible legislative change; confirm current law with a tax professional.

How to complete the forms (practical checklist)

1. Gather all transaction history and compute gain/loss per disposition.
2. Fill Form 8949 rows for each sale/exchange. Use adjustment codes if basis is unreported by a broker/exchange.
3. Carry totals to Schedule D and compute net capital gain or loss.
4. Report ordinary income items tied to crypto (mining, staking, wages) on Form 1040 as required.
5. Answer the virtual-currency question on Form 1040 accurately.
6. Keep supporting documentation in case of IRS inquiry.

For more on completing Form 8949 see this explanatory glossary page: Form 8949 — Sales and Other Dispositions of Capital Assets (applicable to cryptocurrency). To understand how Schedule D summarizes those entries, see: Schedule D (Form 1040) — Capital Gains and Losses.

I also recommend reading our broader guide on Crypto Taxes: Reporting, Calculating Gains, and Compliance Tips for practical workflows and software suggestions.

Practical tips and tools

• Use dedicated crypto tax software to import exchange CSVs, match buys/sells, and generate Form 8949-ready reports.
• Reconcile third‑party 1099s to your internal records. If a 1099 is incorrect, ask the issuer for correction and document your attempts.
• For complex situations (business income, staking pools, international transactions), hire a CPA experienced with virtual currency.
• When in doubt, document assumptions and valuation methods; attach a statement to your return if you used a reasonable method not prescribed by the IRS.

Resources and authoritative references

• IRS Notice 2014‑21 (tax treatment of virtual currency as property): https://www.irs.gov/pub/irs-drop/n-14-21.pdf
• IRS Frequently Asked Questions on Virtual Currency Transactions: https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-virtual-currency-transactions
• About Form 8949, Sales and Other Dispositions of Capital Assets: https://www.irs.gov/forms-pubs/about-form-8949
• Form 1040 and virtual-currency question: see the current Form 1040 instructions on IRS.gov

Final notes and disclaimer

This article explains common reporting rules and practical filing steps but is educational only. Tax law changes and individual facts matter — consult a licensed CPA or tax advisor for advice tailored to your situation. In my practice, timely recordkeeping and early engagement with a tax professional are the two best ways to avoid surprises and penalties when reporting cryptocurrency transactions.