(Spoiler: more than you think, and probably more than your cousin who “day trades on the side” wants to admit.)

Let’s get one thing out of the way immediately: the IRS does not care that your Bitcoin was “basically just sitting there.” It does not care that you “only” swapped one coin for another and never touched a bank. And it certainly does not care that your crypto guru on YouTube told you crypto is “off the grid.” The IRS has never met a financial asset it didn’t want to tax, and digital assets are no exception.

The good news is that crypto taxes, while genuinely more complicated than stock taxes, are not some unsolvable mystery. They just require you to think like the IRS thinks — which, admittedly, is a bit like trying to think like a cat. It’s possible, but it takes patience, snacks, and a willingness to be told “no” a lot.

Here’s what’s actually going on, what changed recently, and what your accountant (hi, that’s me) needs from you before we can keep you out of trouble.

1. Crypto Is Property, Not Money — And That Changes Everything

Since 2014, the IRS has classified virtual currency as property, not currency. This one sentence is the root of almost every crypto tax headache that exists.

Why does it matter? Because property that changes hands in a way that creates gain or loss is a taxable event. Currency, by contrast, is just currency — you don’t pay capital gains tax every time you spend a dollar bill. Crypto doesn’t get that luxury. Every time you sell, trade, or spend crypto, the IRS treats it as if you sold a tiny piece of real estate.

That means these are all taxable events, whether or not a single dollar ever landed in your bank account:

• Selling crypto for cash
• Trading one crypto for another (yes, even Bitcoin for Ethereum — “it’s still just crypto” is not a legal defense)
• Using crypto to buy a coffee, a car, or an NFT of a bored-looking cartoon animal
• Receiving crypto as payment for goods or services
• Earning crypto through staking, mining, or certain airdrops

The only things that generally aren’t taxable are buying crypto with cash and holding it, transferring crypto between your own wallets, and donating crypto to a qualified charity. Everything else? The IRS wants a piece.

2. Meet Form 1099-DA, the New Kid Who Tells On Everyone

For years, crypto exchanges operated in a strange gray zone where they sometimes issued tax forms and sometimes just shrugged. That era is over.

Starting with the 2025 tax year, custodial brokers — think centralized exchanges like Coinbase or Kraken, hosted wallet providers, and crypto payment processors — are required to issue Form 1099-DA, “Digital Asset Proceeds From Broker Transactions,” to both you and the IRS. This form reports the sale or exchange of digital assets such as cryptocurrency, stablecoins, and NFTs, and represents the first standardized information return specifically dedicated to digital asset transactions.

In plain English: the exchange now tells the IRS exactly what you did, at the same time it tells you. This is a fundamental shift from the honor-system era of crypto taxes, and it’s a big reason the IRS is getting noticeably more confident about flagging discrepancies.

A few important nuances worth knowing:

• For the 2025 tax year, brokers only had to report gross proceeds from sales or dispositions — reporting your cost basis (what you originally paid) was optional. Starting with the 2026 tax year, brokers are required to report both gross proceeds and cost basis.
• The reporting requirement currently applies to custodial brokers — the exchanges that actually hold your assets for you — while decentralized exchanges and non-custodial wallets were given a temporary pass on this first wave of rules.
• Not receiving a Form 1099-DA does not get you off the hook. You are required to report all digital asset transactions, including gains and losses, whether or not a form ever shows up in your inbox.

Think of the 1099-DA less like a permission slip and more like a hall monitor who’s finally been given a walkie-talkie.

3. Cost Basis: Where the Real Headaches Live

If gain and loss were simple, this blog post would be a paragraph, not five pages. The tricky part of crypto taxes has never really been “did I have a taxable event” — it’s “how much did I actually gain or lose?”

Your cost basis is what you paid for the asset, including fees. Your gain or loss is the difference between that basis and what you received when you sold, swapped, or spent it. Simple in theory. In practice, crypto investors often buy the same coin at ten different price points across five different platforms over three years, and now need to figure out which specific coins they sold.

A couple of things worth flagging here, because they trip up even savvy investors:

Per-wallet tracking is now the expectation. Under the IRS’s digital asset basis rules, taxpayers are now expected to maintain cost basis records on a per-wallet or per-account basis, rather than treating everything as one combined pool. If you’ve historically averaged your cost basis across every wallet and exchange like one big soup, that approach no longer holds up. Each wallet needs its own accounting.

Specific identification requires advance notice. If you want to use specific identification (choosing exactly which “lot” of crypto you’re selling, rather than defaulting to first-in-first-out) for assets held at a broker, you generally need to notify that broker of your method before the sale happens — not after, when you’re scrambling in April. And regardless of custody, maintaining thorough books and records is essential to actually substantiating that method if the IRS ever asks.

Average cost basis isn’t available for most crypto. Average cost accounting is only available for tokenized mutual funds and tokenized ETFs — not for native cryptocurrency like Bitcoin. So no, you can’t just average everything together and call it a day.

There’s a transition gap. Because cost basis reporting was optional in the first year of Form 1099-DA and only becomes mandatory going forward, there’s a period where basis information may be incomplete — which is a particular risk for anyone who trades frequently or plays in the DeFi sandbox. Translation: don’t assume the form the exchange sends you is the whole story. It might just be half the plot.

This is exactly the kind of thing that turns a fifteen-minute tax return into a three-week archaeology dig — and exactly the kind of thing our office exists to sort out before it becomes a problem.

4. Not All Crypto Income Looks Like a “Sale”

One of the most common crypto tax mistakes isn’t fraud — it’s just not realizing that something counted as income in the first place. The IRS recognizes several distinct flavors of crypto income, and they don’t all get taxed the same way.

Mining and staking rewards are generally taxed as ordinary income at the fair market value of the crypto on the day you received it. Then, when you eventually sell that mined or staked crypto, you’ll owe capital gains tax on any additional appreciation from that point forward. Yes, that’s two separate taxable events from one pile of coins. The IRS does not do “buy one, get one free.”

Airdrops — free tokens dropped into your wallet, often as a marketing gimmick or protocol reward — are typically taxed as ordinary income at fair market value when you gain control over them. “I didn’t ask for this token” is a very reasonable complaint and a very unreasonable tax argument.

Getting paid in crypto for freelance work, goods, or services is ordinary income, valued at the crypto’s fair market value on the date of receipt — same as if your client Venmo’d you and you happened to convert it later.

Capital gains vs. ordinary income matters a lot for your tax bill. Assets held more than a year before selling generally qualify for the lower long-term capital gains rates; assets held a year or less are taxed at your regular ordinary income rate. This is one of the easiest, most legal ways to lower your crypto tax bill — and one of the most commonly ignored, because nobody wants to think about holding periods when the price is doing something exciting.

5. NFTs, DeFi, and Other Things That Make Tax Preparers Sigh

The IRS’s digital asset rules don’t stop at plain vanilla crypto. Form 1099-DA reporting requirements extend to NFTs and stablecoins as well, and the agency has made clear it considers the entire digital asset ecosystem fair game — trading, staking, lending, liquidity pools, yield farming, and whatever creatively named DeFi protocol becomes popular next.

A few things worth knowing if you’re active in this world:

• Stablecoin swaps aren’t automatically tax-free. Trading Bitcoin for USDC is still a disposal of Bitcoin, triggering gain or loss — even though the “value” you’re holding afterward feels boringly stable. There are narrow carve-outs for certain qualifying stablecoin-for-digital-asset exchanges, but don’t assume your specific transaction qualifies without checking.
• DeFi activity generates a paper trail even without a 1099. Because decentralized platforms haven’t been fully looped into 1099-DA reporting yet, the record-keeping burden falls squarely on you. “The DEX didn’t send me anything” is not the same as “I don’t owe anything.”
• NFT sales are capital transactions, and in some cases the IRS treats certain NFTs as collectibles, which can mean a higher long-term capital gains rate than regular crypto. Yes, your profile picture JPEG might be taxed like a rare coin.

6. What Happens If You Just… Don’t Report It?

Let’s talk about the elephant in the blockchain: a lot of people have historically treated crypto taxes as optional, in the same spirit as jaywalking or going five miles over the speed limit. That strategy is aging poorly.

Determining tax on digital asset transactions is a notoriously difficult exercise, often much more so than for traditional financial assets like stocks and bonds — which means many crypto investors haven’t been paying their taxes correctly, and the IRS may already know about it. With brokers now sending Form 1099-DA outlining gross digital asset proceeds directly to the federal government, crypto transactions are far more visible to the IRS than they used to be — and that automated matching between what brokers report and what taxpayers file is exactly what increases the likelihood that discrepancies trigger IRS audit scrutiny.

In other words: the days of “the IRS will never know” are functionally over. The IRS doesn’t need psychic powers anymore — it just needs a spreadsheet and a little patience, and exchanges are now handing it both.

If you’ve under-reported crypto activity in prior years, the worst move is silence. Amended returns, voluntary disclosures, and proactive correction almost always land you in a far better position than waiting for a CP2000 notice to show up wondering why your reported income doesn’t match what three different exchanges told the IRS about you. This is exactly the kind of situation where representation matters — someone who can sit across the table (sometimes literally) from the IRS on your behalf, rather than you trying to explain “cost basis” to an examiner at 8am on a Tuesday.

7. What We Actually Need From You

If you want your crypto taxes handled correctly — and painlessly — here’s the wish list:

1. A full export of transaction history from every exchange and wallet you’ve used, not just the ones that sent you a form.
2. Records of any crypto-to-crypto trades, since these are easy to lose track of and easy for the IRS to notice.
3. Documentation of staking, mining, or airdrop income, including dates and fair market values received.
4. Notes on any crypto used for purchases, donations, or payments to others.
5. Patience, because reconstructing three years of DeFi activity across six wallets is not a fifteen-minute job, even for us.

The investors who come out of tax season unscathed aren’t the ones who got lucky — they’re the ones who kept decent records and asked questions before filing, not after an IRS letter arrived.

The Bottom Line

Crypto is no longer the tax Wild West it was in 2017. The IRS has spent the last few years building the infrastructure — Form 1099-DA, mandatory cost basis reporting, per-wallet tracking rules — to treat digital assets with the same seriousness it treats stocks, real estate, and everything else people try to get creative about. The rules are more complex than traditional investments, the record-keeping burden is higher, and the margin for “I’ll just wing it” has shrunk considerably.

The upside? None of this is scary if you have someone in your corner who actually understands it. That’s the whole point of working with a bookkeeping and tax practice that pays attention to this stuff so you don’t have to lie awake wondering whether your 2021 Dogecoin phase is going to come back to haunt you.

So bring us your CSVs, your confusing wallet addresses, and your vague memories of “that one trade I made at 2am.” We’ve seen worse. Probably yesterday.Questions about how this applies to your specific crypto activity? That’s exactly the kind of