A guide to reporting cryptocurrency transactions on your tax return, including taxable events, cost basis calculations, Form 8949 reporting, and common mistakes to avoid.
Answer the digital asset question on Form 1040 (required for all filers)
Since 2022, Form 1040 asks: 'Did you receive, sell, exchange, or otherwise dispose of any digital assets?' You must answer yes or no. Answering 'no' when you had transactions is considered a false statement on a federal tax return.
Identify all taxable events: selling crypto for cash, trading one crypto for another, using crypto to buy goods or services
Every swap between cryptocurrencies is a taxable event — not just cashing out to dollars. Trading Bitcoin for Ethereum triggers a taxable gain or loss on the Bitcoin. The IRS treats each trade as a sale of one asset and a purchase of another.
Identify non-taxable events: buying crypto with cash, transferring between your own wallets, gifting under the annual exclusion
Moving crypto from one wallet you own to another is not taxable. Buying crypto with dollars is not taxable until you sell. Gifts under $18,000 per recipient per year (2025) have no tax consequences for the giver or receiver.
Report crypto received as income: mining, staking rewards, airdrops, payment for services
Mining and staking rewards are taxable as ordinary income at the fair market value when received. If you mined 0.1 Bitcoin when it was worth $6,000, you have $600 in ordinary income. This also becomes your cost basis for future sales.
Report hard fork tokens received as ordinary income
When a blockchain hard fork gives you new tokens, the IRS considers this taxable income at the fair market value when you gain dominion and control. If you received 10 tokens worth $50 each, you have $500 in ordinary income.
Calculate Cost Basis and Gains
Determine the cost basis for each cryptocurrency lot purchased
Cost basis includes the purchase price plus any fees or commissions. If you bought 1 Bitcoin for $40,000 with a $50 exchange fee, your basis is $40,050. Track each purchase separately because you likely bought at different prices.
Choose an accounting method: FIFO, LIFO, or specific identification
FIFO (First In, First Out) is the default and sells your oldest coins first. Specific identification lets you pick which coins to sell, which is useful for minimizing gains. HIFO (Highest In, First Out) sells your most expensive coins first to reduce gains.
Calculate the holding period for each transaction to determine short-term vs long-term
Held over 1 year = long-term capital gains (0%, 15%, or 20%). Held 1 year or less = short-term, taxed as ordinary income (up to 37%). The holding period starts the day after acquisition and includes the day of disposal.
Calculate the fair market value at the time of each transaction
Use the price from the exchange where the transaction occurred, or a reputable price index. For tokens traded on multiple exchanges with different prices, document which price source you used and apply it consistently.
Track gas fees and transaction costs — these adjust your cost basis or sale proceeds
Gas fees paid when buying crypto increase your cost basis. Gas fees paid when selling reduce your net proceeds. On high-fee networks, gas costs can meaningfully reduce your taxable gain on smaller transactions.
Gather Your Records
Download transaction history from every exchange you used during the year
Most exchanges let you export CSV files with full transaction history. Do this before closing any accounts — some exchanges delete data after account closure. Download records from all exchanges, including foreign ones.
Collect Form 1099-DA or 1099-B from exchanges (if issued)
Starting with 2025 transactions, exchanges must issue Form 1099-DA for crypto sales. Not all exchanges comply fully. Cross-check the form against your own records — exchanges may not have your cost basis if you transferred crypto in from elsewhere.
Compile DeFi transaction records: swaps, liquidity pool deposits, yield farming
DeFi transactions are often harder to track because they happen on-chain without a centralized exchange. Each swap, liquidity provision, and reward claim is a separate taxable event. Use blockchain explorers to reconstruct your history.
Document NFT purchases, sales, and trades
NFTs are taxed the same as other digital assets. Buying an NFT with crypto is a taxable disposal of the crypto. If the NFT qualifies as a collectible, long-term gains may be taxed at the 28% collectibles rate instead of the standard 15-20%.
Report on Your Tax Return
Report each sale or exchange on Form 8949, separated by short-term and long-term
Each transaction needs: description of asset, date acquired, date sold, proceeds, cost basis, and gain or loss. If you have hundreds of transactions, attach a summary statement with 'See attached' on Form 8949.
Transfer totals from Form 8949 to Schedule D
Schedule D combines all your capital gains and losses, including crypto and traditional investments. The net result determines your capital gains tax. Net losses are deductible up to $3,000 per year against ordinary income.
Report crypto received as income on Schedule 1 or Schedule C
Mining income for hobbyists goes on Schedule 1, Line 8z as 'Other income.' If mining is a business, report on Schedule C and pay self-employment tax of 15.3%. Staking rewards and airdrops also go on Schedule 1 or Schedule C.
If you received over $10,000 in crypto in a trade or business, file Form 8300
Businesses that receive over $10,000 in cryptocurrency in a single transaction (or related transactions) must file Form 8300 within 15 days. Failure to file carries penalties up to $25,000 or criminal prosecution for intentional violations.
Avoid Common Mistakes
Don't assume crypto-to-crypto trades are tax-free
This is the most common crypto tax mistake. Swapping Bitcoin for Ethereum is a taxable sale of Bitcoin. The gain or loss on the Bitcoin must be reported even though you never converted to dollars.
Don't forget to report transactions from decentralized exchanges and DeFi protocols
The IRS can trace on-chain transactions. Just because a DEX doesn't issue a 1099 doesn't mean the income is unreported. Blockchain analytics firms work with the IRS to match wallet addresses to taxpayers.
Watch for wash sale implications on crypto
As of 2025, the wash sale rule officially applies to digital assets. You cannot sell crypto at a loss and repurchase the same crypto within 30 days to claim the loss. This is a change from prior years when the rule was ambiguous for crypto.
Keep records for at least 3 years after filing, longer if basis information is missing
If you can't prove your cost basis, the IRS may treat it as zero — meaning your entire sale proceeds would be taxable. Keep purchase records indefinitely, especially for early acquisitions where basis documentation may be hard to reconstruct.
Frequently Asked Questions
Do I owe taxes if I just bought cryptocurrency and did not sell?
No. Buying cryptocurrency with US dollars is not a taxable event. You only owe tax when you dispose of crypto — by selling for cash, trading one cryptocurrency for another, or using crypto to pay for goods or services. Receiving crypto as payment for work is taxable as ordinary income at the fair market value when received. Staking rewards and mining income are also taxable as ordinary income when you receive them, even if you do not sell.
How does the IRS know about my cryptocurrency transactions?
Centralized exchanges like Coinbase, Kraken, and Gemini report to the IRS. Starting with the 2025 tax year, exchanges must issue Form 1099-DA reporting all crypto transactions. Exchanges already file Form 1099-MISC for rewards and staking income over $600. The IRS has obtained customer records from major exchanges through court orders (John Doe summonses). Blockchain transactions are publicly visible, and IRS contractors use chain analysis tools to trace wallets. Tax laws change frequently — verify current rules with the IRS or a tax professional.
Is swapping one cryptocurrency for another a taxable event?
Yes. Trading Bitcoin for Ethereum, or any crypto-to-crypto swap, is a taxable disposition. You must calculate the gain or loss based on the fair market value of the crypto received at the time of the trade, minus your cost basis in the crypto you gave up. DeFi token swaps, liquidity pool entries, and wrapped token conversions may also trigger taxable events depending on the specific transaction structure. The IRS does not treat crypto-to-crypto trades as like-kind exchanges under Section 1031.
What cost basis method should I use for cryptocurrency?
The IRS allows specific identification, FIFO (first in, first out), LIFO (last in, first out), and HIFO (highest in, first out). HIFO typically minimizes your tax bill because it assigns the highest-cost units to each sale, producing the smallest gain. To use specific identification, you must identify the exact units sold at the time of the transaction. If you do not specify a method, FIFO is the default. Once you choose a method for an asset on a particular exchange, apply it consistently. Many crypto tax tools like CoinTracker and Koinly automate this calculation across exchanges.
What happens if I do not report my crypto on my taxes?
The IRS has sent over 10,000 compliance letters to taxpayers it suspects of underreporting cryptocurrency income. Penalties for underreporting include a 20% accuracy-related penalty on the underpaid tax, plus interest from the original due date. In cases of willful evasion, criminal penalties include up to $250,000 in fines and 5 years in prison. Form 1040 now includes a direct question asking whether you received, sold, or exchanged digital assets during the year — answering falsely is considered a false statement on a federal return.