Cryptocurrencies are so new and uncharted that the rules for investing in them may appear to change as quickly as their price values.
To be sure you’re reporting any tax-relevant information correctly and not getting yourself into financial trouble, two financial experts explained what you need to know about crypto before filing your taxes.
One of the most frequent mistakes taxpayers make when reporting cryptocurrency-related income is failing to recognize that digital asset transactions are subject to taxation under the Internal Revenue Code, according to Chad D. Cummings, Esq., a corporate and tax attorney, CPA and CEO at Cummings & Cummings Law.
“Many individuals wrongly assume that crypto is exempt from tax due to its decentralized nature or because it remains held in an online wallet,” he said.
Another common error is failing to track cost basis accurately, Cummings said, particularly when assets have been transferred across platforms or wallets, which can obscure the original acquisition date and value.
Cost basis refers to the original value of a cryptocurrency asset when you bought it, including any fees or commissions you paid during the transaction.
Merely purchasing and holding cryptocurrency is not a taxable event, Cumming said. You’ll face taxes when a crypto transaction “results in the realization of gain or loss.”
This includes:
For each of these scenarios, “a taxpayer has to calculate gain or loss based on fair market value at the time of the transaction,” Cummings said.
Tax liability is generally triggered only when the asset is sold, exchanged or otherwise disposed of. However, staking, mining and airdrops do constitute income upon receipt and are taxed at ordinary income rates.
All cryptocurrency income must be reported the year it is received, regardless of amount, but you might not realize what counts as income. Cryptocurrency earned through mining, staking or airdrops are treated as ordinary income, Cummings explained. However, the IRS treats the mining hobbyist differently from someone operating a mining business. Crypto staking rewards are also treated as gross income. Be warned, too: Airdrops are treated as ordinary income, even if the taxpayer did not request them.
When cryptocurrency is used to purchase goods or services, the IRS treats it as a barter transaction, which means you’ll have to report a gain or loss on the difference between the fair market value of the crypto at the time of disposition and its basis, Cummings shared.
“This means that even a cup of coffee bought with Bitcoin can result in a reportable capital gain or loss.”
For the 2025 tax year, there are lots of big changes coming, according to Nicholas Slettengren, founder of Count On Sheep, a crypto tax and accounting firm. “For 2025, crypto taxes are getting real. Form 1099-DA is coming in 2026, wallet-level cost basis tracking is a must, and the IRS is eyeing mismatches like never before.”
If your records don’t match what exchanges report, expect scrutiny, he warned. “And forget flying under the radar — DeFi, staking, cross-chain activity … it’s all on their watchlist now.”
Taxpayers can deduct crypto investment losses if the losses are realized (you sold it or disposed of it). If you’ve had any capital gains, you can deduct your capital losses up to $1,500 for individuals or $3,000 for joint filers. However, Cummings warned, “Accurate recordkeeping is essential to substantiate these deductions.”
In all of these instances, you do not want to leave your crypto taxes to chance or best guesses. If you’re using multiple crypto platforms, don’t wing it, Slettengren said. “Use tax software like Koinly or CoinLedger, pull in all your wallet and exchange data via API or CSV, and reconcile everything.”
That means matching trades, transfers and cost basis, he said. For serious accuracy, bring in a blockchain accounting firm. “Otherwise, you’re gambling with an audit.”
It’s very important to be able to verify all your crypto transactions for your taxes. If proper records were not maintained throughout the year, Cummings said,”[T]axpayers should attempt to reconstruct data using exchange histories, blockchain explorers, and bank statements.”
Failing to report your crypto, intentionally or not, can result in penalties up to 40%, plus interest, Slettengren warned.
“In serious cases, it can escalate to civil or even criminal charges. And with exchanges sending data straight to the IRS via 1099-DA, flying under the radar isn’t an option anymore.”
Crypto taxes are no longer a gray area, and you can’t play fast and loose with your taxes. Regulations are tightening and the IRS is paying close attention. Staying informed and organized now can save you stress, penalties and money come tax time.
