For years, crypto investors had to rely on their own records to figure out their taxes, and the IRS had to rely on taxpayers to report honestly. That era is over. Every individual tax return now asks about digital assets on the first page of Form 1040, and centralized crypto exchanges have begun sending the IRS a brand-new information return: Form 1099-DA.
If you bought, sold, traded, earned, or spent cryptocurrency, this checklist will help you gather what you need, understand what’s taxable, and avoid the most common reporting mistakes.
Step 1: Answer the Digital Asset Question Correctly
Form 1040 asks whether, at any time during the year, you received digital assets (as a reward, award, or payment for property or services) or sold, exchanged, or otherwise disposed of digital assets. It is a yes-or-no question, and it’s signed under penalty of perjury.
- Answer “Yes” if you sold crypto, traded one coin for another, used crypto to buy something, received crypto as payment, or earned staking, mining, or airdrop rewards.
- You can generally answer “No” if you only bought crypto with U.S. dollars and held it, or only moved it between wallets and accounts you own.
Checking “No” when the answer is “Yes” is one of the easiest ways to draw attention, especially now that exchanges are reporting sales directly to the IRS.
Step 2: List Every Account and Wallet
Make an inventory of everywhere you held crypto during the year:
- Centralized exchanges (for example, Coinbase, Kraken, Gemini)
- Hosted wallets and payment apps that support crypto
- Self-custody wallets (hardware wallets or software wallets like MetaMask)
- Decentralized finance (DeFi) platforms, lending protocols, and staking services
- Crypto ETFs held in a regular brokerage account (these are generally reported on Form 1099-B, like stocks)
Step 3: Identify Your Taxable Events
The IRS treats crypto as property, not currency. That means many everyday transactions trigger a gain or loss. Use this table as a guide:
| Activity | Taxable? | How it’s generally reported |
| Buying crypto with U.S. dollars | No | Keep records to establish cost basis |
| Selling crypto for U.S. dollars | Yes | Capital gain or loss on Form 8949 / Schedule D |
| Trading one crypto for another | Yes | Capital gain or loss on the crypto you gave up |
| Paying for goods or services with crypto | Yes | Capital gain or loss on the crypto you spent |
| Receiving crypto as pay for work | Yes | Ordinary income at fair market value when received |
| Staking and mining rewards | Yes | Ordinary income when you gain control of the rewards |
| Airdrops and hard-fork tokens | Usually | Ordinary income when received and under your control |
| Giving crypto as a gift | Not to the giver, usually | A gift tax return may be required above the annual exclusion |
Step 4: Gather Your Tax Forms
Collect every tax document your platforms issue. The most important new one is Form 1099-DA, Digital Asset Proceeds From Broker Transactions, which is being phased in:
- 2025 transactions (forms issued in early 2026): Brokers report gross proceeds from sales, but they aren’t required to report your cost basis. That means the form shows what you received, not what you gained.
- 2026 transactions (forms issued in early 2027): Brokers must also report cost basis, but only for covered assets, generally those acquired on or after January 1, 2026 and held at the same broker. Coins you bought earlier or transferred in from elsewhere are often noncovered.
Also keep in mind what Form 1099-DA doesn’t cover. After Congress repealed the DeFi broker rule in 2025, decentralized exchanges and self-custody wallets aren’t required to issue these forms. Staking rewards, most DeFi swaps, and wallet-to-wallet transfers may not appear on any form, but they still have to be reported where taxable.
Step 5: Reconstruct Your Cost Basis
Your cost basis is generally what you paid for the crypto, plus fees. Your gain or loss is the difference between what you received and your basis. If you can’t prove basis, you risk paying tax on the full sale price.
- Track basis wallet by wallet. Beginning in 2025, the IRS requires cost basis to be tracked separately for each wallet or account, rather than across your entire portfolio.
- Follow transfers. When you move coins from one exchange to another, the basis moves with them, but the receiving exchange may not know what you paid. This is the number-one cause of 1099-DA mismatches.
- Use consistent records. Download complete transaction histories (CSV files) from every platform, including closed accounts. Crypto tax software helps, but only if the data is complete.
Feeling buried in exchange reports? Get our FREE Personal Tax Guide for a document checklist that helps you organize every income source, including digital assets.
Step 6: Separate Short-Term and Long-Term Gains
How long you held the asset matters. Crypto held one year or less produces short-term gains, taxed at ordinary income rates. Crypto held more than one year produces long-term gains, which qualify for lower capital gains rates. Keeping accurate acquisition dates can make a meaningful difference in what you owe.
Capital losses first offset capital gains. If losses exceed gains, you can deduct up to $3,000 per year ($1,500 if married filing separately) against other income and carry the rest forward to future years.
Step 7: Report Crypto Income Separately
Rewards, payments, and other crypto income are reported at their fair market value in U.S. dollars on the date you received them. That value also becomes your cost basis for when you later sell.
- If you earn crypto as a hobby or casual investor, the income generally goes on Schedule 1.
- If you mine, stake, or accept crypto as part of a business, it generally goes on Schedule C and may be subject to self-employment tax.
- If your employer pays you in crypto, it’s wages and should appear on your Form W-2.
Step 8: Review Special Situations
- Charitable donations. Donating appreciated crypto held more than a year may let you deduct fair market value without paying tax on the gain. Donations over $5,000 generally require a qualified appraisal and Form 8283.
- Lost keys, hacks, and scams. Deducting these losses is complicated and depends heavily on the facts. Don’t claim or skip a loss without professional guidance.
- NFTs. Some NFTs may be treated as collectibles, which can mean a higher maximum long-term capital gains rate.
- Foreign platforms. Accounts on non-U.S. exchanges may raise additional reporting questions. Ask your tax professional whether any foreign reporting rules apply to you.
- Loss harvesting. Selling crypto at a loss to offset gains can be a valuable strategy. Be aware that Congress has considered applying wash sale rules to digital assets, so confirm the current rules before you act.
Step 9: Keep Your Records
Save transaction histories, exchange statements, and tax software reports for at least as long as the IRS can audit the return (generally three to six years). Keep basis records for crypto you still own indefinitely.
Common Crypto Tax Mistakes to Avoid
- Reporting only 1099-DA sales and forgetting DeFi swaps, rewards, and purchases made with crypto.
- Reporting gross proceeds with a zero basis because records are missing.
- Double counting transfers between your own wallets as sales.
Behind on Crypto Reporting? You Have Options
If you didn’t report crypto in prior years, or you’ve received an IRS letter about digital assets, don’t panic and don’t ignore it. Correcting the record proactively is usually far better than waiting for the IRS to find the problem. LP Tax & Bookkeeping Pros helps individuals and investors reconcile crypto activity, prepare accurate returns, and respond to IRS notices.
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