The IRS estimates it misses out on over $50 billion annually in unreported crypto tax transactions, equating to $1.5 billion in lost tax revenues. This has prompted regulators to intensify scrutiny of cryptocurrency activities. In 2022, IRS Form 1040 was updated to include a dedicated digital assets section, requiring taxpayers to disclose receipt or sale of cryptocurrencies and related virtual assets.
Understanding crypto taxation laws—covering possession, transfer, and compliance—helps individuals and businesses identify taxable events and maintain adherence to regulations.
How the IRS Classifies Cryptocurrency
In 2014, the IRS issued Notice 2014-21, its first guidance on cryptocurrencies, treating them as property subject to capital gains taxes. By 2022, the term "digital asset" was formally adopted in tax documentation.
The IRS defines digital assets as blockchain-recorded representations of value, including:
- Cryptocurrencies (CVCs): Bitcoin (BTC), Ethereum (ETH), and other convertible virtual currencies.
- Stablecoins: Tether (USDT) or Pax Gold (PAXG), pegged to fiat or commodities.
- NFTs: Non-fungible tokens representing digital art or collectibles.
Taxable Crypto Transactions
The following activities trigger tax liabilities:
- Selling crypto for fiat → Capital gains/losses.
- Trading crypto for other assets (e.g., BTC to ETH) → Capital gains tax applies.
- Crypto payments → Treated as asset disposal (potential capital gains).
- Mining/staking → Ordinary income based on value at receipt.
- Airdrops/yield farming → Taxable as income or interest.
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Non-Taxable Transactions
- Purchasing crypto with fiat.
- Wallet-to-wallet transfers (under your control).
- Gifts/charitable donations (if under $19,000 in 2025).
Key Tax Forms for Crypto Holders
| Form | Purpose | Threshold |
|------|---------|-----------|
| 1099-MISC | Reports miscellaneous income (e.g., staking rewards, airdrops) | $600+ earnings |
| 1099-B | Tracks capital gains/losses from trades | All broker transactions |
| 1099-DA (New in 2025) | Proceeds from digital asset brokers | Mandatory for brokers |
Calculating Capital Gains
- Short-term: Held ≤1 year → Taxed as ordinary income.
- Long-term: Held >1 year → Lower tax rates apply.
- NFTs: Subject to 28% collectibles tax rate.
Steps to Determine Gains/Losses:
- Log all transactions (dates, amounts).
- Calculate cost basis (purchase price) and fair market value (sale price).
- Report via Form 8949 and Schedule D.
FAQs
Q: Is transferring crypto between my wallets taxable?
A: No—only transfers to third parties incur taxes.
Q: How are crypto donations treated?
A: Donations to 501(c)(3) nonprofits may qualify for deductions; appraisals needed for gifts >$5,000.
Q: Do I pay taxes on lost/stolen crypto?
A: Yes—theft losses are deductible as capital losses (subject to limits).
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Expert Assistance
Windes’ tax professionals specialize in crypto taxation, ensuring compliance while minimizing liabilities. Contact us for tailored guidance.
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