Overview of Crypto Taxation
The IRS treats cryptocurrencies as property, not currency. Every sale, trade, or exchange—including converting crypto to fiat, swapping tokens, staking rewards, and NFTs—can trigger taxable events. Our guidance helps you navigate cost-basis calculations, capital gains rates, and compliance pitfalls.
Reporting Requirements
- Form 8949 & Schedule D: Report each disposition of crypto assets, detailing date acquired, date sold, proceeds, cost basis, and gain or loss.
- Form 1099-K / 1099-B: Some exchanges now issue these; reconcile with your own records.
- Form 1040, Schedule 1: Answer the crypto question (“At any time…”) and disclose taxable income from airdrops, staking, and mining.
- FBAR / Form 8938: If your foreign exchange or wallet holdings exceed reporting thresholds, include crypto balances.
Cost-Basis Tracking Strategies
- First-In, First-Out (FIFO): Simplest for exchanges without lot-level data.
- Specific Identification: Track individual lots to harvest losses. Requires meticulous record-keeping.
- Software Solutions: Leverage crypto tax platforms (e.g., CoinTracker, TokenTax) to automate lot matching and generate IRS-ready reports.
Advanced Considerations
- DeFi & Staking: Rewards are taxable when received at fair-market value; swaps within protocols create disposal events.
- NFTs & Collectibles: Gains on digital art or game assets follow the same capital gain/loss rules; royalty income may be ordinary income.
- Gifts & Donations: Donated crypto may yield charitable deduction at fair-market value if held >1 year.
- Hard Forks & Airdrops: Recognize income when you gain dominion over the new token.
Record-Keeping Best Practices
- Maintain date-stamped exports of all exchange transactions.
- Log wallet-to-wallet transfers to avoid “phantom” taxable events.
- Archive screenshots or CSVs for audit defense.
- Retain records for at least seven years.
Timeline & Typical Fees
| Stage | Timing | Fee Structure |
|---|---|---|
| Initial Consultation | 1–2 weeks | Flat fee |
| Data Import & Reconciliation | 2–4 weeks | Hourly or flat |
| Report Preparation | 1–2 weeks | Hourly |
| Review & Filing Support | By filing deadline | Flat + software fees |
| Audit Defense (if needed) | Variable | Hourly |
Fees vary by transaction volume and complexity. We’ll provide a transparent estimate in your engagement letter.
Frequently Asked Questions
Q: Do I owe tax if I just HODL crypto?
No—holding alone isn’t taxable. You owe tax when you sell, trade, or spend your coins.
Q: Are crypto-to-crypto trades taxable?
Yes. Swapping one token for another creates a disposal and acquisition event.
Q: How do I report DeFi yield farming?
Include fair-market value of rewards as ordinary income on the day you receive them.
Q: Can I deduct crypto losses?
Yes—net capital losses offset gains plus up to $3,000 of ordinary income per year.
Q: What if my exchange didn’t issue a 1099?
You’re still responsible for reporting; use your own transaction history.
Q: Are stablecoins tax-free?
Converting crypto into stablecoins (e.g., USDC) is a taxable sale at market value.
Q: Should I use FIFO or specific ID?
Specific Identification often yields better tax outcomes but requires robust tracking.
Q: What records does the IRS want in an audit?
Transaction logs, wallet exports, exchange statements, and screenshots verifying dates and values.