Why it matters

Cryptocurrency is treated as property by the IRS (Revenue Ruling 2014‑21), so sales and exchanges usually produce capital gains or losses, while receiving crypto as payment, staking rewards, airdrops, or mining income generally creates ordinary income. Accurate forms and records reduce audit risk and make tax filing straightforward (IRS virtual currency guidance: https://www.irs.gov/businesses/small-businesses-self-employed/information-for-virtual-currency-users).

Quick checklist for beginners

  • Identify each taxable event: sale, exchange, receipt as income, staking/airdrops, or using crypto to buy goods/services.
  • Match each event to the correct form or schedule (see Forms & when to use them).
  • Record date, type of crypto, units, USD value at transaction time, cost basis, transaction ID/hash, wallets/exchanges involved, and fees.
  • Keep records at least as long as the IRS may need them (commonly 3 years for routine returns; save longer if you underreported income or to substantiate basis).

Forms & when to use them

  • Form 1040: Report total income on your individual return. Since 2019, Form 1040 asks whether you received, sold, or exchanged virtual currency.
  • Form 8949: Use this to report each capital gain or loss from selling or exchanging crypto; include dates acquired and sold, proceeds, cost basis, and gain or loss. See Form 8949 details: https://www.irs.gov/forms-pubs/about-form-8949.
  • Schedule D: Totals of capital gains and losses from Form 8949 flow to Schedule D.
  • Schedule C and Schedule SE: If you received crypto as payment for services or you’re a miner/trader operating as a business, report ordinary income and business expenses on Schedule C and compute self‑employment tax on Schedule SE.
  • Information returns: Exchanges or brokerages may issue Form 1099‑B, 1099‑K, or 1099‑NEC/MISC depending on activity type. Don’t assume a missing 1099 means you don’t owe taxes.

Recordkeeping best practices (what to keep and how)

  • Minimum data to record for every transaction: date/time (UTC), crypto type and quantity, USD value at the moment of the transaction, transaction purpose (sale, payment, gift, etc.), cost basis, transaction fee, transaction ID/hash, counterparty or platform, and wallet address.
  • Keep exchange statements and export CSVs each year. Screenshots alone aren’t ideal; exports with timestamps are better.
  • Use a consistent method to determine USD value (commonly use exchange rate at time of transaction or a reputable price index). Document the method you used.
  • Retention timeframe: keep supporting records for at least three years after filing; consider seven years if you may have underreported income or need long-term basis documentation.

Practical example

A freelance designer receives 0.5 BTC as payment. On the receipt date, 0.5 BTC = $20,000. She reports $20,000 as ordinary self‑employment income on Schedule C, pays income and self‑employment tax, and records the USD value as her cost basis for future capital gain/loss calculations if she later sells the BTC.

Common beginner mistakes

  • Treating crypto like a bank balance — every sale, trade, or use of crypto to buy goods is potentially taxable.
  • Relying only on wallet screenshots or exchange balances without transaction IDs, timestamps, or USD values.
  • Ignoring small transactions; cumulative small gains can still matter and might be reportable.

Tools and strategies

  • Use reputable crypto tax/portfolio tools (e.g., CoinTracker, Koinly, CryptoTrader.Tax) to import exchange/wallet history and produce Form 8949-compatible reports. In my practice, clients who use tracking software cut preparation time and reduce errors.
  • Reconcile exchange reports to on‑chain transaction records periodically.
  • If you receive crypto from employers or as contractor pay, ask how they report it and request documentation.

When to get professional help

  • Complex situations such as frequent trading across many exchanges, DeFi activity, staking/yield, forks, or large airdrops benefit from a CPA or tax attorney experienced in crypto. If you’re unsure which transactions are capital vs. ordinary income, consult a crypto‑knowledgeable tax pro.

Internal resources

Authoritative sources

Professional disclaimer

This article explains general tax rules for U.S. federal returns as of 2025 and is for educational purposes only. It is not individualized tax advice. For guidance tailored to your situation, consult a qualified tax professional.