CRYPTOCURRENCY TAXES
A TRADERS GUIDE TO CAPITAL GAINS TAX ON DIGITAL ASSETS
CRYPTOCURRENCY TAXES
A TRADERS GUIDE TO CAPITAL GAINS TAX ON DIGITAL ASSETS
Digital assets (including cryptocurrency, stablecoins, and NFTs) are treated as property for U.S. federal tax purposes. That means most sales, trades, and certain uses of digital assets can create taxable gains or losses that must be reported. This guide explains what counts as a taxable event, how gains and losses are generally reported, and what the new Form 1099-DA means for active traders.
CONTENTS
WHAT IS CRYPTOCURRENCY?
Cryptocurrency is a type of digital asset that can be transferred on a blockchain or similar technology. For tax purposes, the IRS uses the term digital asset, defined as a digital representation of value recorded on a cryptographically secured distributed ledger (blockchain) or similar technology. There are thousands of cryptocurrencies and tokens in circulation, and the landscape changes rapidly.
The “Digital Asset” Definition
The IRS has officially transitioned from the narrow term “virtual currency” to the broader category of Digital Assets. This classification includes any digital representation of value recorded on a cryptographically secured distributed ledger or similar technology.
Common examples of digital assets include:
- Cryptocurrencies: Such as Bitcoin and Ethereum.
- Stablecoins: Digital currencies designed to track the value of a fiat currency like the U.S. dollar.
- Non-Fungible Tokens (NFTs): Unique digital assets representing ownership of items like digital art or collectibles.
- Tokenized Securities: Traditional stocks or bonds that have been digitized and continue to represent regulated securities.
Key characteristics of digital assets:
- Irreversible Transactions: Once sent, funds generally cannot be recovered.
- Not FDIC Insured: Digital assets do not have the same protections as traditional bank deposits.
- Asset Class: For tax purposes, the IRS treats these assets as property rather than traditional currency.
TAX TREATMENT FOR CRYPTO
The IRS classifies digital assets—including cryptocurrency, stablecoins, and NFTs—as property. Therefore, most times you sell, exchange, or spend a digital asset, you trigger a taxable event that must be reported as a capital gain or loss.
Common Taxable Events
Because digital assets are treated as property, you generally realize a capital gain or loss when you sell or exchange a digital asset, or when you use it to buy goods or services. Gains and losses are usually short-term (held 1 year or less) or long-term (held more than 1 year).
- Exchanges: Swapping one digital asset for another (e.g., ETH for SOL).
- Fiat Sales: Selling Bitcoin or other assets for U.S. Dollars.
- Rewards & Income: Receiving assets through staking, mining, or certain hard forks is generally treated as ordinary income when the taxpayer has dominion and control.
Using Digital Assets for Purchases
A common misconception is that taxes are only due when selling digital assets for fiat currency (USD). However, using cryptocurrency to purchase goods or services is a taxable disposal of property. Whether you are buying a cup of coffee or a new car, the IRS treats the purchase as a two-step transaction:
- The Sale: You are technically “selling” your digital asset for its fair market value at the time of the purchase.
- The Gain/Loss: You must calculate the difference between your adjusted cost basis and the asset’s value at the time of the purchase.
Under current rules, certain intermediaries that facilitate digital asset transactions may fall under IRS “broker” reporting requirements, which is why some platforms may issue reporting for digital asset dispositions.
- Form 1099-DA: If you use a custodial wallet or a payment processor to buy goods, that processor may issue a Form 1099-DA reporting the transaction to the IRS.
- No “De Minimis” Exception: The U.S. does not currently have a minimum threshold for personal transactions. Consequently, even small everyday purchases trigger a reporting requirement if a gain was realized.
Reporting Crypto Taxable Transactions
In the past, cryptocurrency exchanges were not required to provide standardized tax forms to users, often leaving traders to calculate their own gains and losses from scratch. However, the IRS has introduced Form 1099-DA (Digital Asset Proceeds From Broker Transactions) to bring crypto reporting in line with traditional stock reporting.
The New 1099-DA Standard
Form 1099-DA is the IRS information return used for broker reporting of digital asset transactions. Under IRS regulations, brokers must report gross proceeds for certain digital asset sales and exchanges occurring on or after January 1, 2025. For certain assets acquired on or after January 1, 2026, brokers must also report basis and holding period information as required.
What About Form 1099-K?
Historically, some exchanges issued Form 1099-K for high-volume accounts. Under the new regulations, Form 1099-DA is intended to replace the use of Form 1099-K for most digital asset transaction reporting. This transition is designed to provide more granular data to the IRS and reduce “double reporting” confusion.
The “Missing Basis” Challenge
If you transferred assets from a private wallet or a different exchange before selling them, your 1099-DA may show a $0 cost basis. Ultimately, you are responsible for providing the correct purchase price on your tax return to avoid overpaying.
About That Question on Form 1040…
On the first page of Form 1040, taxpayers must answer a specific question regarding their digital asset activity: “At any time during the tax year, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?” (The wording of this question is updated periodically by the IRS.) This puts all taxpayers on record regarding their digital asset transactions for the year.
How to Answer for “Buy-Only” Activity: According to the official 2025 instructions, certain actions alone generally do not require you to check “Yes”:
- Check “Yes” for sales, trades, or receiving rewards like staking.
- Check “No” if your only activity was simply holding assets or buying them with fiat currency.
TradeLog and Cryptocurrency Transactions
TradeLog does not currently support importing digital asset transactions directly from cryptocurrency brokers or exchanges. Manual entry can be done, but this functionality is limited.
For most traders, we recommend using broker-provided tax reporting and transaction history exports, which are generally sufficient for cryptocurrency tax reporting. TradeLog does not calculate or adjust digital asset wash sales, as such adjustments are generally not required under current IRS guidance.
Wash Sales on Crypto
The wash sale rule in IRC Section 1091 generally applies to stocks and securities. Standard cryptocurrencies are generally treated as property, so wash sale loss disallowance typically does not apply to most crypto transactions under current interpretation. However, tokenized products that represent securities may raise different issues.
Section 475 Mark to Market on Crypto
Section 475 mark-to-market treatment is generally associated with securities (and in some cases commodities), while most digital assets are treated as property. Traders claiming Trader Tax Status should work with a qualified tax professional to determine whether and how any elections apply and to keep reporting properly segregated by asset type.
IRS Guidance & FAQs
Did you know? The IRS maintains a comprehensive set of Frequently Asked Questions to help taxpayers navigate digital asset reporting. These are now split into two main areas:
- General Digital Asset FAQ: Covers foundational topics like cost basis, staking, airdrops, and hard forks.
- Broker Reporting FAQ: Specifically addresses the new Form 1099-DA and the requirements for exchanges and payment processors.
You can find the latest answers and official guidance on the IRS Digital Assets hub.