🇺🇸 Understanding the IRS Definition of Crypto
Before you can report your gains, you must understand how the IRS views cryptocurrency. Since 2014, the IRS has classified crypto as property, not currency. That means every time you sell, trade, or use crypto, you’re engaging in a taxable event.
The IRS considers these transactions similar to selling stocks or real estate. If the value increased since you acquired it, you owe taxes on that gain.
Examples of taxable events:
- Selling Bitcoin for USD
- Trading ETH for SOL
- Buying coffee with Litecoin
- Using crypto to purchase an NFT
Examples of non-taxable events:
- Buying crypto with USD and holding it
- Transferring crypto between wallets you own
- Donating crypto to a qualified charity
Understanding these distinctions is the first step to accurate reporting.
📈 What Counts as a Gain?
A capital gain happens when you sell or trade crypto for more than you paid. The difference between the purchase price (cost basis) and the sale price is the amount of the gain.
Let’s break it down:
- You buy 1 ETH for $1,000 in January
- You sell it in June for $1,500
- Your gain is $500
If the sale price is less than your purchase price, that’s a capital loss, which can offset gains or reduce taxable income (up to $3,000 per year).
Tracking gains and losses is essential, and the only way to do it properly is to keep detailed records.
🛠️ Tools You Need to Track Crypto Gains
Because most exchanges don’t provide complete tax forms, it’s your responsibility to calculate and report crypto gains. You’ll need to gather and organize the following:
- All transaction histories (trades, purchases, swaps)
- Wallet transfers with time/date stamps
- USD value of each transaction at time of event
- Blockchain explorer records (if needed for verification)
- Any mining/staking income received
Crypto tax software like CoinTracker, Koinly, or CoinLedger can make this much easier. They import data from wallets and exchanges and generate IRS-compatible forms automatically.
🧮 How to Calculate Your Crypto Gains
To calculate gains correctly, follow these steps:
- Identify the cost basis – This is the original price you paid, including fees.
- Identify the fair market value – This is the value in USD when you sold or traded.
- Subtract cost basis from sale value – That’s your gain or loss.
- Categorize the holding period – If you held it more than a year, it’s a long-term gain (lower tax rate). If not, it’s short-term (taxed as regular income).
Example:
- Bought 0.5 BTC at $20,000 in July 2022
- Sold 0.5 BTC at $35,000 in August 2023
- Gain = $15,000 → long-term capital gain
- You report this in your tax return using Form 8949 and Schedule D
🧾 What Tax Forms Do You Need?
To report your crypto gains accurately, you’ll need the following IRS forms:
1. Form 8949 – Sales and Dispositions of Capital Assets
This form lists each individual transaction: what you sold, when, and how much you gained or lost.
2. Schedule D – Capital Gains and Losses
This summarizes all capital gains and losses, pulling data from Form 8949.
3. Form 1040 – U.S. Individual Income Tax Return
You answer a Yes/No question on the first page:
“At any time during the year, did you receive, sell, send, exchange, or otherwise dispose of any financial interest in any virtual currency?”
Answering “Yes” triggers further scrutiny, so it’s crucial that your forms match up.
If you earned crypto through mining, staking, or as income, you may also need:
- Schedule C for self-employment income
- Schedule 1 for additional income
- Form 1099-NEC or 1099-MISC if applicable
💼 Reporting Crypto Income vs. Gains
Crypto can be taxed as capital gains or ordinary income, depending on how it was earned.
| Type of Activity | Tax Category | Report on… |
|---|---|---|
| Selling crypto | Capital gain | Form 8949 + Schedule D |
| Trading crypto | Capital gain | Form 8949 + Schedule D |
| Buying with crypto | Capital gain | Form 8949 + Schedule D |
| Mining rewards | Ordinary income | Schedule C or Schedule 1 |
| Staking rewards | Ordinary income | Schedule C or Schedule 1 |
| Airdrops | Ordinary income | Schedule 1 |
If you convert earned crypto to USD, you’ll pay tax on both the income value and any capital gains from appreciation.
💼 Long-Term vs. Short-Term Gains: Why It Matters
The holding period makes a big difference in how much tax you owe:
- Short-term gains (held ≤ 12 months): Taxed at your regular income rate (10–37%)
- Long-term gains (held > 12 months): Taxed at a lower rate (0%, 15%, or 20%)
Example:
- You earn $60,000 per year in wages
- You also have $5,000 in short-term crypto gains
- Those gains are taxed like your salary
But if they were long-term, you might only owe 15% or even 0%, depending on your total income.
Holding your crypto longer can reduce your tax burden significantly.
🧠 Wash Sales and Crypto: What You Should Know
In traditional finance, a wash sale occurs when you sell a security at a loss and repurchase it within 30 days to claim a tax benefit.
Currently, crypto is not subject to wash sale rules. This means you can:
- Sell your crypto at a loss
- Immediately repurchase the same asset
- Realize a capital loss to offset gains
- Still hold the asset for future upside
Some experts believe this loophole may close in future IRS guidance, so take advantage while it lasts—responsibly.
📊 Crypto Tax Software: How It Helps You Stay Compliant
Keeping track of every crypto transaction manually is nearly impossible, especially if you trade frequently or use multiple platforms. That’s why crypto tax software is essential. These platforms automate the tracking and calculation of your gains, losses, and income across wallets and exchanges.
Popular options include:
- Koinly
- CoinLedger
- TokenTax
- CoinTracker
Most of these tools connect to your exchanges and wallets via API or CSV files and generate the necessary tax forms. They help:
- Calculate cost basis automatically
- Determine short- and long-term gains
- Generate Form 8949 and Schedule D
- Track staking, mining, airdrops, and more
By using tax software, you reduce human error and make audit protection easier.
⚠️ Common Mistakes When Reporting Crypto Gains
Even with the right tools, mistakes happen. And the IRS doesn’t accept ignorance as an excuse. Here are the most frequent errors that can get you in trouble:
1. Failing to report small trades
Even if you only made $50 from trading Dogecoin, you must report it. Every taxable event counts, no matter how small.
2. Not tracking cost basis correctly
Missing fees or incorrect purchase dates can drastically change your taxable gain. Always record accurate purchase prices and dates.
3. Mixing personal and business transactions
If you use crypto for both personal and business purposes, you must separate the transactions. Using the same wallet can confuse reporting.
4. Forgetting about staking rewards
Staked crypto is taxed as income upon receipt—even if you don’t withdraw it. Many forget to include this income, leading to penalties.
5. Failing to include wallet transfers
While wallet-to-wallet transfers aren’t taxable, they must be tracked to verify cost basis and avoid confusion with actual trades.
🔎 Can the IRS Really See My Crypto Activity?
Yes, absolutely. The IRS has significantly increased its ability to track crypto activity in recent years. They use several tools and strategies:
🧠 Blockchain analytics tools
The IRS contracts with companies like Chainalysis and TRM Labs to monitor blockchain transactions and uncover suspicious activity.
🧾 Form 1099-K and 1099-B
Many U.S.-based exchanges now issue tax forms to both users and the IRS. If your reported return doesn’t match what the IRS sees, it could trigger an audit.
⚖️ Legal action
The IRS has issued John Doe summonses to exchanges like Coinbase, Kraken, and others, forcing them to reveal user data on accounts with large or suspicious transactions.
So yes—the IRS can and does monitor crypto. If you don’t report, they may eventually catch on.
🔐 The Importance of Keeping Crypto Tax Records
The IRS requires taxpayers to keep records for at least three years. However, due to the complexity of crypto, it’s safer to keep them for longer—up to seven years in some cases, especially if you claim large losses or adjustments.
You should save:
- Receipts of crypto purchases
- Exchange trade histories
- Wallet transfer logs
- Fiat deposits/withdrawals
- Staking or mining rewards documentation
- NFT transaction records
Proper records protect you in case of audit and help you accurately track performance over time.
💰 How to Offset Gains With Losses
One of the biggest tax-saving strategies is to use capital losses to offset gains. If you lost money on some trades, those losses can reduce your total taxable gain.
Example:
- You made $10,000 in gains from Ethereum
- You lost $4,000 on Solana
- You only pay taxes on $6,000
Additionally, you can deduct up to $3,000 of crypto capital losses from your regular income per year if your losses exceed your gains. Excess losses beyond that can be carried forward to future years.
This strategy, known as tax-loss harvesting, is a powerful way to reduce your tax bill.
🏦 Reporting NFT Transactions to the IRS
If you bought, sold, or created NFTs, those actions are also taxable. The IRS hasn’t issued exhaustive guidance yet, but most experts agree:
- Selling an NFT = capital gain/loss
- Buying with crypto = disposing of an asset (taxable event)
- Minting an NFT and earning royalties = taxable income
Always record:
- The date of minting or purchase
- The USD value of the crypto used
- The sale price or royalty income
- Gas fees and marketplace fees
Include this activity on your Form 8949 and Schedule D, or Schedule C if you’re considered a self-employed creator.
💵 What If You Receive Crypto as Payment?
If someone pays you in crypto for goods or services, the IRS treats this the same as regular income. You must:
- Record the fair market value in USD at the time of receipt
- Include it as income on Schedule C if you’re self-employed
- Pay both income tax and self-employment tax (15.3%)
Later, if the value of that crypto changes and you sell it, you also report a capital gain or loss. Yes, it gets taxed twice—once as income and again if it appreciates.
This is why it’s vital to keep track of dates and values precisely.
⏱️ When Are Crypto Taxes Due?
Your crypto gains and income must be reported by the regular tax deadline, which is typically April 15 each year (or the next business day if it falls on a weekend or holiday).
If you need more time, you can file for an extension, but that doesn’t delay your payment deadline. Late payments may incur penalties and interest, even if you eventually file the forms.
You can use estimated payments throughout the year if you earn substantial income from crypto (mining, trading, staking, etc.) to avoid underpayment penalties.
🚨 What Happens If You Don’t Report?
The consequences for failing to report crypto gains can be severe:
- IRS penalties for underpayment
- Interest charges on late payments
- Audits that can dig into your entire financial history
- Criminal charges in extreme cases (willful tax evasion)
The IRS has sent warning letters (6173, 6174, and 6174-A) to thousands of crypto users since 2019. They’ve also included the crypto question on Form 1040 to highlight its importance.
In short: Not reporting your gains is a bad idea.
🧾 Filing Your Crypto Taxes With the IRS: Step-by-Step
Let’s walk through how to actually file your crypto taxes correctly using standard IRS forms:
🧩 Step 1: Gather All Your Data
Start by collecting every transaction involving crypto:
- Purchases and sales of cryptocurrencies
- Wallet transfers (even if non-taxable)
- Mining/staking/airdrops income
- NFT activity
- Crypto received as payment
Use crypto tax software or spreadsheets to compile this data.
📝 Step 2: Complete Form 8949
This form reports capital gains and losses. List every sale or disposal of crypto individually, including:
- Description of property (e.g., “0.5 BTC”)
- Date acquired and sold
- Proceeds and cost basis
- Net gain or loss
You must separate short-term and long-term gains. Attach as many continuation sheets as needed.
📄 Step 3: Transfer Totals to Schedule D
Form 8949 flows into Schedule D, which summarizes your capital gain/loss activity. If you sold crypto at a profit, that amount gets taxed at:
- Short-term rate (ordinary income) for assets held less than a year
- Long-term capital gains rate (0%, 15%, or 20%) if held over a year
💵 Step 4: Report Crypto Income
If you earned crypto through:
- Mining
- Staking
- Airdrops
- Referral bonuses
- Receiving payment for services
You must report this as ordinary income. Include it on:
- Schedule 1 (if irregular income)
- Schedule C (if from self-employment)
Crypto income is taxed at your marginal tax rate, not capital gains.
🔄 Amending Past Tax Returns: If You Forgot to Report
Did you forget to report crypto transactions in previous years? Don’t panic—you can amend your past tax returns with Form 1040-X. This shows the corrected information and helps you avoid harsher IRS penalties.
Steps to amend:
- Retrieve the original tax return
- Use crypto tax software to recreate your gain/loss
- File Form 1040-X and attach revised Schedule D/8949
It’s better to correct your mistake proactively than wait for the IRS to catch it.
🧮 How to Handle Airdrops and Forks on Your Tax Return
The IRS classifies airdrops and hard forks as ordinary income, taxed at the asset’s fair market value upon receipt—even if you didn’t ask for it.
Example:
- You receive 50 tokens via an airdrop.
- At the time, they’re worth $2 each.
- You must report $100 in income, even if you never sell them.
This value also becomes your cost basis for future capital gains or losses. If the token drops to $0, you’ll realize a loss when selling.
🏢 Crypto on Business Tax Returns
If you operate a business or freelance using crypto, report all crypto income and expenses on Schedule C. This includes:
- Payments received in crypto
- Business-related mining or staking rewards
- Crypto used for advertising or services
You can deduct ordinary business expenses (hosting fees, hardware, etc.), but you still owe income tax and self-employment tax on profits.
If your business involves large-scale mining or crypto services, consider forming an LLC or S-Corp to manage your taxes more efficiently.
🧑⚖️ What to Do If You’re Audited
If the IRS questions your crypto activity:
- Stay calm and cooperative
- Provide your exchange and wallet records
- Present Form 8949 and Schedule D
- Show how your cost basis was calculated
If you’ve kept detailed records, you’ll be fine. But if you’ve omitted information or can’t prove your gains/losses, the IRS may:
- Disallow deductions
- Recalculate your tax bill
- Impose penalties or interest
If the situation escalates, consider hiring a tax professional with crypto experience.
🌎 How U.S. Crypto Taxes Differ From Other Countries
Many other countries have different approaches:
- Germany: No tax on crypto held over one year
- Portugal: Personal crypto gains are tax-free
- Canada: Taxes crypto as business income if active trading
- UK: Capital gains tax applies, similar to U.S.
If you’re a U.S. citizen living abroad, you still owe crypto taxes. The IRS taxes global income, though treaties may help avoid double taxation.
🌐 How Crypto Exchanges Report to the IRS
Since 2023, many U.S.-based crypto exchanges are required to report user transactions to the IRS using:
- Form 1099-B (sales of securities or property)
- Form 1099-MISC (income like staking or airdrops)
- Form 1099-K (for high-volume payment processors)
This transparency makes it harder to hide crypto activity. If the IRS receives a 1099 and you don’t include it, that discrepancy may trigger an audit letter.
Starting in 2025, the IRS will enforce even more robust reporting under the Infrastructure Investment and Jobs Act.
📌 Crypto Tax Planning Tips
Here are smart ways to manage your tax bill:
📉 Harvest Losses
Sell underperforming crypto to offset gains. Use wash sale rules to your advantage (currently not enforced for crypto in the U.S.).
🧾 Use Tax Software Early
Don’t wait until April. Start tracking your trades now to avoid last-minute errors.
📆 Hold for Long-Term Gains
Whenever possible, hold assets for over a year to qualify for lower tax rates.
🔁 Use Retirement Accounts
Investing in crypto ETFs inside a Roth IRA or 401(k) can help defer or eliminate taxes.
📚 Stay Informed
Crypto tax laws evolve quickly. Follow reliable sources or use tax advisors with blockchain knowledge.
🧠 Final Thoughts: Be Proactive, Not Reactive
Crypto taxes may seem intimidating, but they’re manageable with the right knowledge, tools, and habits. Whether you’re a casual investor, frequent trader, or NFT collector, the key is transparency and accurate record-keeping.
Avoid the temptation to underreport or ignore your obligations. The IRS is watching, and penalties can be steep. Taking crypto seriously as an asset class means treating your taxes just as seriously.
Stay organized, report honestly, and make crypto taxes just another part of your financial strategy—not a burden.
✅ Conclusion
Understanding how to report crypto gains on your taxes is essential if you’re serious about digital assets. Whether you’re a casual holder or an active trader, the IRS expects compliance. By organizing your records, using the right forms, and staying informed, you can avoid unnecessary stress and legal issues. Crypto may be decentralized, but your responsibilities to the IRS are not.
This content is for informational and educational purposes only. It does not constitute investment advice or a recommendation of any kind.
👉 Interested in crypto? Explore our structured crypto education channel here:
https://wallstreetnest.com/category/cryptocurrency-digital-assets/