How the IRS taxes cryptocurrency: an accounting guide

Cryptocurrency shows up on a US tax return more often than most people expect. Buy, sell, or trade a coin and you have likely created something the IRS wants reported. This is a plain guide to how crypto is taxed and what records make that reporting possible, whether you keep your own books or hand them to a preparer.

One point has held steady since 2014: the IRS treats cryptocurrency as property, not as money. That single fact drives almost everything below.

Crypto is property, not currency

To the IRS, a bitcoin or an ether is closer to a share of stock than to a dollar. It has a cost when you acquire it and a value when you dispose of it, and the difference is a capital gain or loss. Notice 2014-21 set this treatment, and the guidance and FAQs since then have built on it rather than replaced it.

Because it is property, holding crypto is not itself taxable. You owe tax when you dispose of it, and disposal covers more situations than people assume.

Which crypto moves are taxable

Each of these is a taxable event:

• Selling crypto for US dollars. The plainest case. Proceeds minus what you paid is your gain or loss.
• Trading one coin for another. Swapping ether for bitcoin is a sale of the ether, even though no dollars change hands. The dollar value of what you received sets your proceeds.
• Spending crypto on goods or services. Paying for a laptop in bitcoin is treated as selling the bitcoin first, then buying the laptop.
• Receiving crypto as income, such as mining or staking rewards or payment for work.

Buying crypto with dollars and holding it is not taxable. Moving coins between two wallets you own is not taxable either, though it is worth logging so your records stay clean.

How gains and losses are figured

A capital gain or loss is the proceeds from a disposal minus your cost basis. Cost basis is what you paid to acquire the coin, including fees. Proceeds are the fair market value in US dollars at the moment you dispose of it.

An example. You buy one coin for $9,000 including fees, then later sell it for $10,000. Your gain is $1,000. If instead you traded that coin for another when it was worth $10,000, the math is the same: $1,000 of gain, and the $10,000 becomes the cost basis of the new coin.

How long you held the coin decides the rate. Held a year or less, the gain is short term and taxed at ordinary income rates. Held longer than a year, it is long term and taxed at lower capital gains rates. Losses offset gains and can reduce other income within annual limits.

Cost basis gets harder to track when coins move across several exchanges and wallets. Each acquisition has its own basis, and you have to match the right basis to each sale. This is the part that eats the most time when a return is reconstructed after the fact.

Mining, staking, and other crypto income

When you receive crypto as a reward or as payment, its dollar value on the day you receive it is ordinary income. That same value becomes your cost basis if you later sell.

Whether mining or staking counts as a hobby or a business changes where it lands. Hobby income goes on Form 1040 as other income. If you operate as a business, it goes on Schedule C, where it is subject to self-employment tax but also lets you deduct related expenses. How you actually operate, not a label you pick, decides which applies.

What the IRS already sees

Two changes have made crypto much easier for the IRS to track.

Form 1040 asks a direct question about digital assets near the top of the return. Everyone answers it, yes or no, and answering falsely carries its own consequences.

Exchanges now report to the IRS. Starting with the 2025 tax year, US exchanges that count as brokers report the gross proceeds from your sales on Form 1099-DA, much like a stock broker reports on a 1099-B. Cost basis reporting phases in after that. The practical effect is that the IRS often sees what you sold before you file.

That reporting is also why cost basis matters so much. A 1099-DA can show proceeds without basis, so an unadjusted figure can make a sale look far larger than the real gain. In the example above, proceeds of $10,000 with no basis shown would read as $10,000 of income instead of $1,000.

Enforcement is not new. In 2019 the IRS mailed more than 10,000 letters, the 6173, 6174, and CP2000 notices, to taxpayers it believed had unreported crypto. Those letters still go out. Reporting accurately the first time is how you stay off that list.

One more practical point: the IRS does not accept crypto as payment. Tax is owed in dollars. If most of your money is tied up in coins, plan to sell some to cover the bill.

Records to keep

Good records are what turn a stressful filing into a routine one. For each coin, keep the date you acquired it, what you paid including fees, the date you disposed of it, and the dollar value at that time. Export this from every exchange and wallet you use, and hold onto it after you file.

Reliable records also protect you if a return is ever questioned. Rebuilding years of activity from memory is where mistakes and penalties come from.

What to do this year

1. List your accounts. Every exchange and wallet you touched during the year.
2. Pull the data. Export full transaction history from each, not just year-end balances.
3. Match basis to each sale. Tie every disposal to what you originally paid.
4. Answer the digital asset question honestly on Form 1040.
5. Get help if the year is messy. Multiple exchanges, staking, DeFi, or missing basis is when a specialist is worth the fee.

Crypto tax is detailed, but it is not mysterious. Treat coins as property, track basis carefully, and report in dollars, and most of the difficulty falls away.