Quick overview

The IRS treats cryptocurrency as property, not currency, so many crypto transactions trigger taxable events (Notice 2014-21). That means sales, swaps, payments received in crypto, mining proceeds, airdrops, and certain staking rewards generally create taxable income or capital gain/loss that must be reported on your tax return (IRS Virtual Currency FAQs, accessed Sep 2025).

In my work advising clients on crypto taxation, the most common pain points are incomplete records and using the wrong forms. Below I explain which transactions are reportable, how to compute basis and gain, which IRS forms to use, recordkeeping best practices, and practical tips to reduce risk and fix past reporting errors.

Which crypto transactions must be reported?

  • Selling crypto for fiat (e.g., selling Bitcoin for USD) — capital gain or loss (short-term if held one year or less, long-term if held more than one year).
  • Trading one crypto for another (e.g., ETH → LTC) — treated as a taxable disposition of the coin you exchanged; compute gain or loss using FMV at the time of the trade.
  • Receiving crypto for goods or services — ordinary income equal to the fair market value (FMV) at receipt; if you’re self-employed, report on Schedule C.
  • Mining, staking rewards, and some airdrops — usually taxable as ordinary income when you have dominion and control; subsequent sale may produce capital gain/loss (see Rev. Rul. 2019-24 and IRS guidance).
  • Receiving crypto as interest or yield from DeFi platforms — typically taxable as ordinary income at receipt; treatment can vary by structure.
  • Gifts and inheritances — gifts generally are non-taxable to the recipient (but can affect basis); inherited crypto receives step-up in basis (subject to estate tax rules).

Authoritative reference: IRS Virtual Currencies (https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies) (Accessed Sep 2025).

How to calculate cost basis and gain/loss

  • Cost basis is the amount you paid for the crypto, including fees. If you received crypto as income, your basis is the FMV when you received it.
  • When you dispose of crypto, gain or loss = amount realized (FMV of proceeds) − adjusted basis.
  • Holding period determines short-term vs. long-term capital treatment.
  • Basis methods: by default many taxpayers use FIFO (first-in, first-out), but you can use specific identification if you can prove which units were sold. Specific identification is often beneficial but requires reliable records (see Publication 544 and Form 8949 instructions).

IRS forms and instructions: Form 8949 and Schedule D for capital gains/losses; Form 1040 and related schedules for ordinary income (Form 1040 question on virtual currency must be answered) (Form 8949 instructions: https://www.irs.gov/instructions/i8949) (Accessed Sep 2025).

Which tax forms should I use?

  • Form 8949: report each taxable disposition of capital assets (crypto sales and trades). Enter date acquired, date sold, proceeds (FMV), cost basis, and gain/loss.
  • Schedule D: summary of totals from Form 8949; used to compute net capital gain or loss.
  • Schedule 1 (Form 1040): for other income lines (e.g., mining if not self-employed).
  • Schedule C (Form 1040): report self-employment income if you receive crypto as payment for goods or services or if mining/staking is a business.
  • Form 8821/Form 4506-T: for authorizing tax professionals or getting transcripts when amending returns.

Tip: The Form 1040 top-of-page virtual currency question should be answered truthfully each year. The IRS uses that flag in compliance matching.

Special situations and nuances

  • Mining and Staking: Mining rewards are ordinary income at FMV when you receive them. If mining is a business, you may deduct ordinary business expenses on Schedule C. Staking rewards’ taxation depends on control and timing of receipt; consult current IRS guidance.

  • Airdrops and Hard Forks: If you receive new tokens from a fork or an airdrop and you have dominion and control, that receipt may be taxable as ordinary income (see Rev. Rul. 2019-24 and IRS FAQs).

  • DeFi, Liquidity Pools, and Yield Farming: Each token conversion, earned reward, or fee distribution is potentially taxable. DeFi increases the volume and complexity of reportable events — track each token’s FMV at receipt.

  • NFTs: Tax treatment depends on use. Selling an NFT produces capital gain/loss if held as an investment; creating and selling NFTs could be business income.

  • Gifting and Donations: Donating appreciated crypto to a qualified charity can be tax-efficient — generally you can deduct FMV if you’ve held it long-term. Gifts to individuals are generally non-taxable to the recipient but affect the donor’s gift tax reporting thresholds.

Recordkeeping: exactly what to keep

Good records are essential for correct reporting and for defending an audit. Keep:

  • Dates of acquisition and disposal for every transaction.
  • FMV in USD at time of each transaction (use exchange rate snapshots or reputable pricing sources).
  • Transaction type, counterparty/exchange, transaction IDs, and wallet addresses when relevant.
  • Receipts, invoices, and records of fees and commissions.
  • Exported exchange statements and CSVs; snapshots of wallets if needed.

In practice I recommend reconciling exchange-provided transaction histories with blockchain-level records. Use reputable crypto tax software to import trades and generate Form 8949 drafts — they reduce errors but don’t replace human review.

Suggested resources on the site: guidance on [how to report cryptocurrency transactions on your tax return](