Overview
Since the IRS clarified in Notice 2014-21 that virtual currency is treated as property for federal tax purposes, U.S. taxpayers must report many cryptocurrency activities just like other property transactions. That means gains and losses from sales or exchanges are capital gains or losses; receipts of crypto for services or as mining rewards are ordinary income at fair market value when received. (IRS: Virtual Currencies — https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies)
This entry explains which actions create taxable events, which forms typically apply, practical recordkeeping steps, cost-basis options, and common compliance pitfalls I see in practice. It is written from an experienced CPA’s perspective but is educational — consult a tax professional for personal advice.
Which crypto activities create tax-reporting obligations?
- Selling cryptocurrency for fiat (USD): Taxable — report gain or loss. If sale price > cost basis, you have a capital gain; if lower, a capital loss.
- Exchanging one cryptocurrency for another: Taxable — exchanging BTC for ETH is treated as a sale of BTC for USD-equivalent and purchase of ETH, triggering gain/loss measurement in USD.
- Using crypto to buy goods or services: Taxable — spend crypto, you realize gain/loss measured by the difference between the fair market value at disposal and your cost basis.
- Receiving crypto as payment for goods or services: Ordinary income — include fair market value on receipt as gross income; self‑employed taxpayers typically report on Schedule C.
- Mining rewards and staking payouts: Ordinary income at fair market value when you receive them; miners/stakers who are in business also owe self‑employment tax and may report income on Schedule C.
- Airdrops, hard forks, and token distributions: Often taxable as ordinary income when you have dominion and control over the new asset; reporting depends on facts and timing.
Which tax forms and schedules apply?
- Form 8949 and Schedule D (Form 1040): Report capital gains and losses from sales or exchanges of crypto (typically where you held an asset as an investment). See FinHelp: Form 8949 — Sales and Other Dispositions of Capital Assets: https://finhelp.io/glossary/form-8949-sales-and-other-dispositions-of-capital-assets/
- Form 1040 — Other income reporting: Report ordinary income (mining rewards, payments for services) on Form 1040. If the crypto-related activity is a business (e.g., you’re a miner or you accept crypto as business revenue), report on Schedule C; otherwise, report on Schedule 1 as “Other income.”
- Information returns from platforms: Exchanges may send Forms 1099-K, 1099-B, or other statements. These are informational; you must reconcile them to your own records and report correctly on Form 8949 / Schedule D or on your Form 1040.
For a practical walkthrough of the common forms and mistakes, see our related guide: Cryptocurrency Tax Reporting: Forms, Records, and Common Mistakes — https://finhelp.io/glossary/cryptocurrency-tax-reporting-forms-records-and-common-mistakes/
How to measure cost basis and calculate gain or loss
Your gain or loss equals the USD proceeds at the time of disposition minus your cost basis. Cost basis is generally the USD value when you acquired the crypto (purchase price plus fees). If you received crypto as income, your basis is the fair market value included in income.
Common cost-basis methods:
- First-In, First-Out (FIFO): Often the default method used by taxpayers and some exchanges.
- Specific Identification: You identify which lots were sold (requires detailed records and exchange support or wallet logs).
- Average cost: Typically available for securities; not commonly accepted for crypto unless your broker/exchange provides and the method is supported by IRS practice. Check with your CPA.
In my practice, specific identification can materially reduce taxable gains for investors who acquired the same token in many lots at varying prices. But it requires meticulous records showing which lot you sold and supporting timestamps and transaction IDs.
Recordkeeping checklist (practical and required)
Keep one consolidated ledger for the tax year that includes:
- Transaction date and UTC timestamp
- Type of transaction (buy, sell, trade, transfer, mining reward, airdrop, payment received)
- Number of tokens
- USD value at acquisition and at disposal (source clearly documented)
- Exchange or wallet used and transaction ID (txid)
- Fees paid (network fees, exchange fees)
- Any related invoices or receipts
Use a reputable crypto tax or portfolio tracker to help reconcile exchange statements and wallets. Popular options include CoinTracking, Koinly, and CryptoTrader.Tax — these tools export Form 8949-compatible reports that can reduce manual errors. Even with software, always keep raw exchange statements and wallet data for audit support.
Reconciling exchange reports and third‑party data
Exchanges and brokerages increasingly send informational returns to both taxpayers and the IRS. Historically, these statements differ in methodology (some use FIFO, others report gross proceeds without subtracting cost basis). Reconcile every platform’s 1099 or tax statement to your ledger before filing.
If you receive an IRS notice for mismatch, the IRS typically relies on third‑party reporting to trigger inquiries. Correct mismatches promptly — if the IRS expects tax on a 1099 you didn’t report, you’ll want to file an amended return rather than wait.
Common mistakes I see (and how to avoid them)
- Treating transfers between personal wallets or self‑custodial wallets as taxable. Movement between wallets you own is not a taxable event — but keep transaction IDs showing both addresses are yours.
- Ignoring small transactions and micro‑gains. The IRS expects accurate reporting even for small profits; aggregated micro‑sales can add up.
- Misclassifying mining rewards or staking. If you receive rewards, they’re income when received — waiting until you sell can under‑report taxable income.
- Failing to document cost basis for tokens received via airdrop/fork. Without proof of fair market value at receipt, you’ll have trouble proving basis to the IRS.
- Overlooking fees. Include transaction and exchange fees in basis or proceeds calculations where appropriate to ensure correct gains/losses.
One notable tax nuance: current IRS guidance treats cryptocurrency as property, and wash‑sale rules that apply to securities do not clearly apply to crypto under current law (as of 2025). That means strategies like selling at a loss and quickly buying back the same crypto may produce a deductible loss today that would be disallowed for stocks via the wash‑sale rule. Because legislation could change, consult your tax advisor before relying on this.
Practical example (concise)
You bought 1.0 BTC on 2021‑01‑10 for $30,000 (cost basis $30,000). On 2024‑03‑15 you spent that 1.0 BTC to buy a car with a fair market value of $45,000 at the time. You have a long‑term capital gain of $15,000 ($45,000 − $30,000) to report on Form 8949 / Schedule D. If you received the BTC as payment for freelance work instead, the $45,000 would be ordinary income when received and your basis would be $45,000 for a later sale.
Amending returns and audits
If you discover a missed taxable event from a prior year, filing an amended return (Form 1040‑X) is usually the best route. In my experience, proactive voluntary amendments before IRS contact often result in lower penalties and better outcomes than waiting for a notice.
Keep audit‑ready documentation: the IRS will want to see exchange statements, wallet txids, and source records for valuation. If you receive notice or CP letters referencing unreported crypto income, respond promptly and consider professional representation.
When to get professional help
- You have high‑volume trading across multiple exchanges and wallets
- You run a mining or staking operation
- You received large airdrops or complex fork distributions
- You face an IRS notice or potential audit
As a CPA who has prepared crypto tax filings and responded to IRS inquiries, I advise involving a tax pro early. Proper cost‑basis selection, specific‑identification documentation, and timely amendments are areas where professional help prevents costly mistakes.
Resources and related reading
- IRS — Virtual Currencies (overview and FAQs): https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies
- FinHelp — Form 8949 — Sales and Other Dispositions of Capital Assets: https://finhelp.io/glossary/form-8949-sales-and-other-dispositions-of-capital-assets/
- FinHelp — Cryptocurrency Tax Reporting: Forms, Records, and Common Mistakes: https://finhelp.io/glossary/cryptocurrency-tax-reporting-forms-records-and-common-mistakes/
- FinHelp — Cryptocurrency Recordkeeping Best Practices for Tax Reporting: https://finhelp.io/glossary/cryptocurrency-recordkeeping-best-practices-for-tax-reporting/
Professional disclaimer
This article is educational and does not constitute tax or legal advice. Tax rules for digital assets can change. Consult a qualified CPA or tax attorney familiar with cryptocurrency taxation for advice tailored to your situation.
Sources cited in text: IRS Notice 2014‑21 and the IRS Virtual Currencies webpage. For current IRS guidance and FAQs, see the IRS research links above (2025 updates may apply).
