How do I report cryptocurrency transactions on my tax return?

by | May 2, 2025 | Income Reporting, Individual Taxes

Here’s what HIVE AI had to say about “How do I report cryptocurrency transactions on my tax return?”:

Cryptocurrency transactions are taxable events that must be reported on your tax return. The IRS treats cryptocurrency (also called digital assets) as property for tax purposes, not as currency. Here’s a comprehensive guide on how to properly report your cryptocurrency transactions.

Understanding the Tax Treatment of Cryptocurrency

In March 2014, the IRS issued Notice 2014-21 and Information Release IR-2014-36, on the income tax treatment of virtual currency, such as bitcoin. The IRS explained that virtual currency is treated as property, rather than currency, for tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency. IRS IRM 25.1.2 Recognizing and Developing Fraud

This means that when you sell, trade, or otherwise dispose of cryptocurrency, you must report the transaction and may have a capital gain or loss that needs to be reported on your tax return.

Types of Taxable Cryptocurrency Events

The following cryptocurrency activities generally trigger tax reporting requirements:

If, in 2024, you disposed of any digital asset, which you held as a capital asset through a sale, trade, exchange, payment, or other transfer, check “Yes” and see Pub. 570 for details on whether you have to file Form 1040 with the United States to report your capital gains or losses. IRS – Instruction 1040-SS: Instructions for Form 1040-SS, U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico)

Taxable events include:

  • Selling cryptocurrency for fiat currency (like USD)
  • Trading one cryptocurrency for another
  • Using cryptocurrency to purchase goods or services
  • Receiving cryptocurrency as payment for goods or services
  • Mining or staking rewards

Rev. Rul. 2023-14 provides that if a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is included in the taxpayer’s gross income in the taxable year in which the taxpayer gains dominion and control over the validation rewards. The fair market value is determined as of the date and time the taxpayer gains dominion and control over the validation rewards. The same is true if a taxpayer stakes cryptocurrency native to a proof-of-stake blockchain through a cryptocurrency exchange and the taxpayer receives additional units of cryptocurrency as rewards as a result of the validation. IRS Determination-202444009

The Digital Asset Question on Form 1040

In March 2022, the IRS issued Information Release IR-2022-61 which reminded taxpayers that there is a virtual currency question at the top of the 2021 Form 1040, Form 1040-SR, and Form 1040-NR. In January 2023, the IRS issued Information Release IR-2023-12 to remind taxpayers that they must again answer a digital asset question and report all digital asset related income when they file their 2022 federal income tax return. In January 2024, the IRS issued Information Release IR-2024-18 to remind taxpayers that they must again answer a digital asset question and report all digital asset related income when they file their 2023 federal income tax return. IRS IRM 25.1.2 Recognizing and Developing Fraud

All taxpayers must answer the digital asset question on Form 1040, regardless of whether they engaged in any cryptocurrency transactions. The question asks if at any time during the tax year, you:

  • Received (as a reward, award, or compensation)
  • Sold
  • Exchanged
  • Disposed of
  • Or otherwise acquired a financial interest in any digital asset

Do not leave the question unanswered. You must answer “Yes” or “No” by checking the appropriate box. IRS – Instruction 1040-SS: Instructions for Form 1040-SS, U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico)

Activities That Don’t Require a “Yes” Answer

The following activities generally don’t require you to check “Yes”: • Holding a digital asset in a wallet or account; • Transferring a digital asset from one wallet or account you own or control to another wallet or account that you own or control; or • Purchasing digital assets using U.S. or other real currency, including through the use of electronic platforms such as PayPal and Venmo. IRS – Instruction 1040-SS: Instructions for Form 1040-SS, U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico)

How to Report Cryptocurrency Capital Gains and Losses

If you sold, exchanged, or otherwise disposed of cryptocurrency, you’ll need to report these transactions on your tax return:

During the IRS webinar on taxable events involving digital assets, the IRS covered:

Forms You’ll Need

  • Form 8949 (Sales and Other Dispositions of Capital Assets): List each cryptocurrency transaction separately, including:
    • Description of the property (e.g., “1 Bitcoin”)
    • Date acquired
    • Date sold or disposed of
    • Proceeds (fair market value at time of sale/disposition)
    • Cost basis (what you paid plus fees)
    • Gain or loss
  • Schedule D (Capital Gains and Losses): Summarize the totals from Form 8949.

Determining Cost Basis

When you don’t supply a computation of your cryptocurrency gains and losses, the IRS may use records received from exchanges to reconstruct them, matching purchases and sales on a “first in, first out” basis. Dawson U.S. Tax Court Opinions: James H. Kim

You should maintain detailed records of:

  • When you acquired each unit of cryptocurrency
  • Your purchase price in USD
  • Transaction fees
  • When you sold, traded, or otherwise disposed of the cryptocurrency
  • The fair market value at the time of disposition

Reporting Mining, Staking, and Other Income

If you received cryptocurrency from mining, staking, airdrops, or as payment for goods or services:

  • This is generally considered ordinary income, not a capital gain
  • Report the fair market value of the cryptocurrency at the time of receipt as income
  • Report this income on Schedule 1 (Additional Income and Adjustments to Income) or Schedule C if you’re engaged in a trade or business

Upcoming Changes in Reporting Requirements

The U.S. Department of the Treasury and the Internal Revenue Service issued final regulations requiring custodial brokers to report sales and exchanges of digital assets, including cryptocurrency. These reporting requirements will help taxpayers to file accurate tax returns with respect to digital asset transactions, which are already subject to tax under current law. They require brokers to report certain sale and exchange transactions that take place beginning in calendar year 2025 and will be reported on the soon-to-be released Form 1099-DA. https://www.irs.gov/newsroom/treasury-irs-issue-final-regulations-requiring-broker-reporting-of-sales-and-exchanges-of-digital-assets-that-are-subject-to-tax-under-current-law-additional-guidance-to-provide-penalty-relief-address#:~:text=2024%2D178%2C%20June%2028%2C%202024,tax%20under%20current%20law https://www.irs.gov/newsroom/treasury-irs-issue-final-regulations-requiring-broker-reporting-of-sales-and-exchanges-of-digital-assets-that-are-subject-to-tax-under-current-law-additional-guidance-to-provide-penalty-relief-address#:~:text=They%20require%20brokers,released%20Form%201099%2DDA

This means that starting with the 2025 tax year, you may receive Form 1099-DA from cryptocurrency exchanges, which will report your transactions to both you and the IRS.

Record-Keeping Best Practices

Maintaining good records is crucial for accurate cryptocurrency tax reporting:

  • Transaction logs: Keep detailed records of all cryptocurrency transactions, including dates, amounts, and values in USD at the time of the transaction.
  • Exchange statements: Download and save all transaction history from exchanges where you’ve traded cryptocurrency.
  • Wallet addresses: Maintain a list of all wallet addresses you control.
  • Method consistency: Use a consistent method (FIFO, LIFO, specific identification) for calculating cost basis.

There remain significant open issues that will need additional analysis and further guidance to refine the reporting of these transactions, e.g., whether virtual currency held for investment is a capital asset; whether the virtual currency ought to be treated as a security, subject or not subject to the wash sale rules, or affected by mark to market implications under Section 475; whether a taxpayer may use LIFO or FIFO to determine the basis of virtual currency sold; basis tracking through activities in the blockchain; whether broker reporting is required under section 6045 of the Code for transactions using virtual currency; whether a taxpayer may contribute virtual currency to an IRA; and whether virtual currency is a commodity. IRS – Publication 5315: Information Reporting Advisory Committee Public Report

Consequences of Not Reporting Cryptocurrency Transactions

Failing to report cryptocurrency transactions can lead to penalties, interest, and potentially even criminal charges in cases of willful non-compliance:

These regulations are an important part of the larger effort on high-income individual tax compliance. The IRS needs to make sure digital assets are not used to hide taxable income, and these final regulations will improve detection of noncompliance in the high-risk space of digital assets. https://www.irs.gov/newsroom/treasury-irs-issue-final-regulations-requiring-broker-reporting-of-sales-and-exchanges-of-digital-assets-that-are-subject-to-tax-under-current-law-additional-guidance-to-provide-penalty-relief-address#:~:text=These%20regulations%20are,digital%20assets

The IRS has been actively enforcing cryptocurrency tax compliance:

In March 2018, the IRS issued Information Release IR-2018-71 to remind taxpayers to report virtual currency transactions. In July 2018, the IRS made an announcement of a virtual currency campaign to urge taxpayers to correct their returns as soon as possible if they have not reported virtual currency transactions. In July 2019, the IRS issued Information Release IR-2019-132 regarding letters to virtual currency owners that potentially failed to report income or did not properly report their transactions advising them to file amended returns and pay back taxes. IRS IRM 25.1.2 Recognizing and Developing Fraud

Conclusion

Cryptocurrency transactions are taxable events that must be reported on your tax return. By understanding the tax implications of your cryptocurrency activities and maintaining detailed records, you can accurately report your transactions and avoid potential penalties. As cryptocurrency regulations continue to evolve, staying informed about the latest IRS guidance is essential for compliance.

Remember that the IRS is increasing its focus on cryptocurrency tax compliance, with new reporting requirements for brokers beginning in 2025. If you have complex cryptocurrency transactions or are unsure about how to report them, consider consulting with a tax professional who specializes in cryptocurrency taxation.

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