Tax Season and Cryptocurrency: What You Need to Know
Tax season is currently underway, and if you have engaged with cryptocurrency in any form—be it buying, selling, staking, or trading NFTs—it’s crucial to be aware that the IRS is closely monitoring these activities. In recent years, the Internal Revenue Service has intensified its focus on digital asset transactions, categorizing cryptocurrencies and other digital assets, like non-fungible tokens (NFTs), as property instead of currency for tax purposes. This classification has significant consequences: property transactions are subject to capital gains taxes when sold or exchanged, unlike conventional currencies. Therefore, despite the term “currency” being part of the name, cryptocurrencies are treated more similarly to stocks or real estate by the IRS than to traditional currencies like dollars or euros. Consequently, accurate tax reporting for those involved with digital assets is now mandatory. Here, we will outline five essential steps to take before the filing deadline of April 15, 2025, and suggest three proactive measures you can implement now to ease the tax process for next year.
Attention to Accountants, Bookkeepers, and Tax Advisors
If you are a bookkeeper, CPA, or enrolled agent tasked with preparing tax returns or advising clients involved with cryptocurrency, it is imperative to elevate your knowledge immediately. Digital assets have transitioned from a peripheral issue to a mainstream financial concern that carries intricate tax implications. Neglecting to ask the appropriate questions or failing to understand the specifics of digital asset transactions could expose your clients to penalties, audits, and unwanted scrutiny, and it may also put you at risk of professional liability. While some exchanges provide tax forms such as 1099-B, 1099-K, or newer versions like 1099-DA, others do not issue any tax documentation. This inconsistency in reporting can result in significant reporting gaps if you rely solely on the tax documents provided by clients from platforms such as Coinbase, Binance, or Kraken. Starting in 2026, new broker reporting requirements will further complicate the landscape without necessarily simplifying it. Consequently, employing crypto transaction tracking tools—especially those that integrate seamlessly with professional tax preparation software like UltraTax, Drake, or Lacerte—is no longer optional; it’s essential. Tools like CoinTracker, Koinly, and TaxBit can help aggregate wallet and exchange activity, categorize transactions, and create tax reports that comply with regulations, ultimately alleviating the burden on your practice and enhancing audit preparedness. The new wave of clients is already navigating this space, and they depend on you to be well-equipped.
Key Actions to Take Before April 15, 2025
1. You Must Respond to the “Digital Asset” Inquiry on Your Tax Return: Near the top of your individual tax return (Form 1040), the IRS has introduced a vital question: “At any time during the tax year, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?” This question requires an answer, and accuracy is paramount. You should check “Yes” if you have sold cryptocurrency for fiat (like Bitcoin for USD), traded one digital asset for another (such as ETH for SOL), received crypto from staking, mining, or airdrops, used crypto for purchases, or sold or traded NFTs. Conversely, if you have only bought and held digital assets without any transactions, you may select “No.” However, it’s advisable to consult a tax professional if you are uncertain about the details regarding digital assets.
2. Report All Taxable Events, Even Those Without Profit: Taxable events involving digital assets are not limited to profitable transactions. The IRS clearly states that “If you have digital asset transactions, you must report them whether or not they result in a taxable gain or loss.” Notable taxable events include selling or swapping crypto, using crypto for purchases, earning income from staking, mining, or airdrops, and minting or selling NFTs. Capital gains or losses should be reported using Form 8949 and Schedule D, while income from crypto activities may be reported on Schedule 1 (for supplemental income) or Schedule C (for self-employed individuals). It’s important to note that even receiving a digital asset without selling it (like in the case of airdrops or staking rewards) can incur a tax liability since it is considered ordinary income when received.
3. NFTs Are Included, and Some May Be Taxed as “Collectibles”: Non-fungible tokens, or NFTs, are unique digital assets often linked to art, music, or other digital media. The IRS guidance (Notice 2023-27) specifies that certain NFTs may be classified as “collectibles” per tax regulations. This classification is important because profits from the sale of collectibles are subject to a maximum 28% capital gains tax rate, which is higher than the standard long-term capital gains rate for other assets. Thus, whether you are flipping an NFT or holding a tokenized piece of art, you need to report any gains or losses. If the underlying asset qualifies as a collectible, the tax rate could be elevated.
4. Use Tax-Loss Harvesting to Offset Gains: If 2024 proved to be a challenging year in terms of market performance, you might be able to lower your tax bill through tax-loss harvesting. This strategy involves realizing losses to counterbalance realized gains. You can offset capital gains with capital losses on a dollar-for-dollar basis, deduct up to $3,000 of net capital losses against ordinary income, or carry forward any unused losses to subsequent tax years. This applies to altcoins that have dropped in value, NFTs that lost their liquidity, and failed DeFi projects. In 2023, the IRS also released guidance that may support loss claims for worthless or abandoned assets, so consulting with a tax advisor is recommended for the best application of these rules.
5. Maintain Records and Understand Your Basis: One of the most commonly overlooked elements of crypto taxation is recordkeeping. As a taxpayer, you are responsible for tracking the following information: Date of acquisition and sale or disposition, cost basis (the original purchase price, plus any fees), sale price or fair market value at the time of use or exchange, and wallet addresses or transaction IDs from exchanges. This data is essential to calculate your gains or losses and determine your tax obligations. “Keep records. Calculate your capital gain or loss. Determine your basis. Report on the correct form,” according to the IRS Digital Assets FAQ. To simplify this process, consider utilizing digital tools such as CoinTracker, Koinly, or TaxBit, which can help aggregate and reconcile transactions across various wallets, exchanges, NFTs, and DeFi platforms.
Steps You Can Take Now for Next Year
1. Link Your Wallets and Exchanges to Tax Software: Many tax preparation challenges can be averted by connecting your wallets and exchanges with crypto tax software early and frequently. Most tax platforms enable you to import historical transactions, monitor gains and losses throughout the year, and track staking, yield farming, and NFT activities. Opt for software that supports Layer 2 networks such as Arbitrum or Optimism, NFT marketplaces like OpenSea or Magic Eden, and DeFi platforms like Uniswap, Compound, or Aave. The objective is to avoid surprises at year-end and automate data entry as much as possible.
2. Select the Appropriate Cost Basis Method: FIFO, LIFO, or Specific ID: Your approach to calculating capital gains can have a notable impact on your tax liability. The IRS offers multiple options: FIFO (First-In, First-Out), which is the default method that sells your oldest assets first; LIFO (Last-In, First-Out), which sells your most recently acquired assets first and may reduce gains in a declining market; and Specific Identification, which permits you to choose which lots to sell, provided you maintain detailed records and use compatible tax software. For the tax year 2025, Revenue Procedure 2024-28 clarifies how to assign basis across wallets and exchanges. Collaborating with your CPA or tax advisor can help you optimize this flexibility.
3. Prepare for Broker Reporting Starting in 2026: As of the 2025 tax year, crypto “brokers” will be mandated to submit Form 1099-DA or similar tax documents to the IRS. These reports will encompass sale proceeds, transaction dates, and customer information. While this requirement won’t take effect for the 2024 tax year, some platforms have already begun to issue 1099 forms voluntarily. In the future, inconsistencies between your self-reported transactions and third-party reports could lead to IRS inquiries. If you receive a 1099 form, ensure that it aligns with your own records. If you don’t receive one, you are still required to report your gains, losses, and income.
Concluding Thoughts
Cryptocurrency has evolved from a niche segment of the financial system to a recognized component of the broader economy, capturing the attention of regulators. The IRS has expanded its enforcement capabilities, hired experts, and developed tools to track digital asset activities. Whether you are a casual investor holding Bitcoin or Ethereum, a frequent trader dealing in altcoins and tokens, an NFT creator or collector, or a DeFi participant managing liquidity pools, you are now subject to tax regulations that are becoming increasingly complex. Your best strategy is to pursue education, preparation, and informed professional advice. Not all tax advisers possess the same level of expertise, so it’s essential to choose wisely. Begin by maintaining detailed records, staying informed about regulatory changes, and working with tax professionals who are well-versed in the evolving landscape of cryptocurrencies. Remember that while ignorance can be costly, proactive measures taken now can lead to significant savings come next April.
