The IRS treats cryptocurrency and other digital assets as property, not as money. That means a sale, a swap or a purchase made with crypto can create a taxable gain or loss, and some crypto you receive is ordinary income. Every individual return asks about digital assets, brokers now send a new form, and records are the hard part. This guide explains the basics in plain English.
What counts as a digital asset
For tax purposes, a digital asset is any digital representation of value recorded on a distributed ledger or similar technology. That includes Bitcoin and other cryptocurrencies, stablecoins and NFTs.
What is taxable
You answer "Yes" to the Form 1040 digital assets question if, at any time during the year, you received digital assets as a reward, award or payment for property or services, or you sold, exchanged or otherwise disposed of a digital asset or a financial interest in one. In practice, these events matter:
| Event | Tax result |
|---|---|
| Selling crypto for U.S. dollars | Capital gain or loss |
| Swapping one crypto for another | Disposition of the first asset; gain or loss |
| Paying for goods or services with crypto | Disposition; gain or loss, plus a purchase |
| Paying a transaction fee in crypto | A disposition of that crypto |
| Receiving crypto as wages or for freelance work | Ordinary income at its dollar value when received |
| Mining, staking rewards or an airdrop tied to a fork | Ordinary income |
| Buying crypto with dollars and holding | Not taxable until you dispose of it |
| Moving crypto between wallets you own | Not taxable |
| Giving crypto as a gift | Gift tax rules; Form 709 may apply |
You must report digital asset transactions whether or not they result in a taxable gain or loss.
How gain or loss is figured
Gain or loss is the U.S. dollar value of what you receive minus your basis, which is generally what you paid in dollars. Holding the asset one year or less makes the result short-term, and more than one year makes it long-term. Rates are the same as for other investments. See capital gains and losses.
Example: Priya buys 1 coin for $20,000. Eight months later she uses 0.1 coin, which cost $2,000, to pay for a laptop worth $3,000. She has a $1,000 short-term gain on the 0.1 coin. If she had received 0.01 coin as a mining reward worth $600 on the day she got it, that $600 would be ordinary income, and her basis in that coin would be $600.
You track each unit: the date and time, number of units, fair market value and basis. If you bought the same asset at different times and prices, the unit you sold matters.
Identifying which units you sold
You may choose which units you sold if you can identify them and prove their basis. The IRS explains in Revenue Procedure 2024-28 that if you do not identify specific units, the units are treated as sold on a first-in, first-out (FIFO) basis. That procedure also gave taxpayers a safe harbor to allocate unused basis to the digital assets held in each wallet or account as of January 1, 2025. Talk to your preparer before you move or sell assets, since the tracking method affects the gain you report.
Form 1099-DA
Brokers that hold customers' digital assets use Form 1099-DA, Digital Asset Proceeds From Broker Transactions. The IRS says:
- Brokers must report gross proceeds for transactions on or after January 1, 2025, so you may receive the first forms for 2025 sales.
- Brokers must report basis for certain transactions on or after January 1, 2026.
- Real estate professionals treated as brokers must report fair market value for certain closings starting in 2026.
- Pub. 17 notes that for 2025 a broker has the option to report your basis but is not required to, and you must still answer the digital assets question even if you receive a Form 1099-DA.
Notices 2024-56 and 2025-33 give penalty relief to brokers that make a good-faith effort for 2025 reporting. Notice 2024-57 excludes some transactions, such as staking and lending, from reporting until further guidance. These rules are for brokers; your own reporting duties stay the same. If the proceeds on a form do not match your records, or if you did not receive a form, you still have to report the transaction correctly. A mismatch can trigger an IRS notice such as a CP2000.
Where to report
- Sales and exchanges of digital assets held as capital assets: Form 8949, summarized on Schedule D.
- Ordinary income such as staking, mining or airdrops: Schedule 1 of Form 1040.
- Wages paid in digital assets: reported as wages on Form 1040.
- Payments for freelance or business services, or sales to customers: Schedule C. See self-employment tax.
The 3.8% net investment income tax can also apply to gains if your income is above the thresholds.
Records
Keep purchase confirmations, exchange statements, wallet addresses, transaction hashes, and the dollar value of crypto at the time you received it. Download full transaction histories from exchanges, because they may not keep old data. See how long to keep tax records.
Scams
The IRS warns that it does not require registration of digital assets and is not sending letters asking you to register crypto on a "compliance portal" or scan a QR code. If you receive such a letter, do not click or scan. See is this IRS letter real?.
State considerations
Illinois starts from your federal adjusted gross income, so crypto gains and income that you report federally are generally included on the Illinois return as well. Other states follow their own rules. See our Illinois guide.
How we can help
We reconstruct basis from exchange histories, reconcile Form 1099-DA with your records, and prepare Form 8949 and Schedule D. If you hold digital assets on a foreign platform, ask us about foreign reporting questions. See investors and crypto, tax planning or contact us.
Frequently asked questions
Do I owe tax if I only buy and hold crypto?
No. Buying with dollars and holding is not taxable. You owe tax when you sell, swap, spend or otherwise dispose of it, or when you receive it as income.
Is moving crypto between my own wallets taxable?
No, if you control both wallets. A network fee paid in crypto is a disposition, though.
What if I lost money?
You can report a capital loss, subject to the $3,000 annual limit against other income, with the rest carried forward. You still must report each transaction.
What if I did not get a Form 1099-DA?
You are still responsible for reporting your transactions. Not every platform issues the form, and some transactions are outside the reporting rules.
Official sources
- IRS: Digital assets
- IRS: About Form 1099-DA, Digital Asset Proceeds From Broker Transactions
- IRS: Publication 17 (2025), What's New
- IRS: Rev. Proc. 2024-28, allocating basis in digital assets
This page is a plain-language summary. The official source controls if there is any difference.
General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.