How to handle cryptocurrency transactions for tax purposes

by | Sep 6, 2025 | Complex Client Situations

Here’s what HIVE AI had to say about “How to handle cryptocurrency transactions for tax purposes”:

Tax Treatment of Cryptocurrency and Digital Assets

What counts as a digital asset

  • The IRS treats cryptocurrency and other blockchain-based tokens as “digital assets,” and digital assets are treated as property. General property tax rules apply to purchases, sales, exchanges, and dispositions. This includes cryptocurrencies, NFTs, and other tokens recorded on a cryptographically secured distributed ledger. 1

Common taxable events and how they’re reported

Selling or exchanging crypto

  • Selling crypto for fiat or exchanging one crypto for another is a taxable disposition that generally triggers capital gain or loss if you’re not a dealer. Character is capital if the asset is a capital asset in your hands; ordinary if it’s not a capital asset (e.g., dealer inventory). 2

Using crypto to buy goods or services

  • Paying with crypto is treated as if you sold the crypto for its fair market value (FMV) at the time of payment, creating a gain or loss relative to your basis. 1

Receiving crypto as income (work, services, mining, staking)

  • Crypto received for goods or services, or as mining/staking rewards, is ordinary income at FMV when you have dominion and control (you can sell/transfer it). That FMV becomes your basis for future gain/loss. 3

Airdrops, hard forks, and other receipts

  • New assets received via hard forks, airdrops, or certain protocol events can be taxable upon receipt when you have dominion and control, measured at FMV at that time. See IRS guidance catalog for specifics. 4

Determining fair market value (FMV) and basis

FMV at receipt

  • If not on an exchange, you may use a reputable blockchain/explorer index value at the exact date and time the transaction would be recorded to establish FMV. If using another source, be prepared to substantiate accuracy. 5

Basis and holding period

  • Basis typically equals your purchase cost (including fees) or the income you recognized at receipt (for services/mining/staking/airdrops). Holding period starts the day after acquisition and determines short-term (≤1 year) or long-term (>1 year) capital gain/loss treatment under general property rules. 1

How to report on your tax return

Digital asset question on Form 1040

  • If you engaged in any digital asset transaction during the year, check “Yes” on the Form 1040 digital asset question. 1

Schedules and forms

  • Capital transactions: Report each sale/exchange on Form 8949 and Schedule D. Follow the IRS instructions for digital assets when completing Form 8949. 6
  • Ordinary income: Report crypto received for work/services/mining/staking as ordinary income in the year you gained dominion and control, using the appropriate line or schedule (e.g., Schedule 1, Schedule C if self-employment). 3

Recordkeeping expectations

Maintain detailed records

  • Keep records of each acquisition and disposition, including dates/times, amounts, wallet addresses, transaction IDs, fees, counterparties (if known), and FMV in U.S. dollars at relevant times. You must maintain sufficient records to support positions on your return. 4
  • IRS FAQs reiterate the requirement to maintain records of receipts, sales, exchanges, and FMV determinations. 5

Special topics you may encounter

Staking and mining timing

  • Income is recognized when you have dominion and control over staking/mining rewards—often when they are credited and transferable—even if the protocol previously restricted access; timing is facts-and-circumstances based. 3

Assets received in non-exchange transactions

  • For P2P or other off-exchange receipts, use a reliable explorer or aggregated index at the exact date/time to establish FMV. Document your methodology. 5

Character of gains and losses

  • Investors generally have capital gains/losses. Dealers or those holding crypto as inventory may have ordinary character. Evaluate your facts carefully. 2

IRS compliance focus

  • The IRS actively monitors digital asset activity, provides webinars, and issues notices when it detects unreported transactions. Expect scrutiny and ensure complete reporting. 7
  • Taxpayers may receive soft notices (e.g., Letter 6173) if the IRS believes reporting is missing or incomplete, and the letters direct taxpayers to file or explain. 8

Broker and transfer reporting environment

  • Congress expanded broker reporting to digital assets; brokers must report certain transfers of covered digital assets to non-broker addresses. Expect increasing 1099 reporting and data matching. 9

Practical steps to get compliant and optimize

Build a complete transaction ledger

  • Aggregate data from all exchanges, wallets, and DeFi protocols. Reconcile transfers between wallets to avoid phantom gains/losses. Maintain timestamped FMV evidence. 4

Choose and apply a consistent cost-basis method

  • Use an acceptable lot-relief method (e.g., FIFO, specific identification where adequately documented). Ensure method is consistent with IRS instructions for Form 8949. 6

Separate income vs. capital items

  • Report ordinary income from rewards, services, or airdrops separately from capital gains. Use the income amounts as basis for later dispositions. 3

Document FMV determinations

  • If using off-exchange values or explorers, retain screenshots/URLs and methodologies to substantiate FMV at the recorded time. 5

Answer the 1040 digital asset question correctly

  • Check “Yes” if you received, sold, exchanged, or otherwise disposed of any digital asset. 1

Need help tailoring this to your situation?

  • Tell me which activities you had (buy/sell, swaps, DeFi, NFTs, mining, staking, payments, airdrops, forks), your use of exchanges vs. wallets, and whether you earned crypto for services or business. I can walk you through line-by-line reporting and help identify planning opportunities like harvesting losses, holding for long-term rates, and separating business vs. investment activity. 7

Sources

1 – IRS – Publication 544 Sales and Other Dispositions of Assets 📄 Summarize
2 – IRS Determination-202302011 📄 Summarize
3 – Rev. Rul. 2023-14 📄 Summarize
4 – IRS.gov – Digital assets 📄 Summarize
5 – IRS.gov – Frequently asked questions on virtual currency transactions 📄 Summarize
6 – IRS.gov – Instructions for Form 8949 (2024) 📄 Summarize
7 – IRS Newsroom – IR-2024-44 📄 Summarize
8 – IRS IRM 21.3.1 Taxpayer Contacts Resulting From Notice Issuance 📄 Summarize
9 – IRC § 6045A(d) 📄 Summarize

Try Your AI Tax Assistant for Free!

Ready to transform your practice with agentic AI in tax? See firsthand how our cutting-edge AI tax tools can revolutionize your approach to tax research and planning.

Create Your Free Account