How to Handle Crypto on Your Taxes: What the IRS Requires

The IRS requires you to report any disposal or receipt of cryptocurrency. A taxable event occurs when you sell crypto for cash, trade one coin for another, use crypto to buy goods or services, receive crypto as payment for work, earn staking or mining rewards, or get coins through an airdrop or hard fork you control.

Each event has a fair market value in USD at the time of the transaction. For a sale or trade, you calculate gain or loss by subtracting your cost basis (what you paid, plus fees) from the fair market value at disposal.

Most exchanges provide a 1099-B or transaction history CSV. You or your tax software must match every sale with its acquisition to establish basis.

Wash-sale rules—which prevent claiming a loss if you repurchase the same stock within 30 days—do not currently apply to cryptocurrency, though proposed legislation may change this. As of 2024, you can sell crypto at a loss and immediately buy it back to harvest the loss for tax purposes.

Mining and staking rewards are taxable when you receive them. If you mine as a hobby, report the value on Schedule 1 (additional income); if you run a mining business, use Schedule C and deduct expenses like equipment and electricity.

Airdrops are income when you have dominion and control—typically when the tokens appear in your wallet and you can transfer or sell them. Hard forks that create new coins you control are also income at receipt.

Your cost basis is what you paid for the crypto, including purchase price and any transaction fees. If you bought 1 BTC for $30,000 and paid a $50 fee, your basis is $30,050.

Tracking becomes complex if you make dozens or hundreds of trades. You must know the acquisition date, amount, and price for every coin you dispose of.

Failing to report crypto transactions can result in penalties, interest, and potentially criminal charges for tax evasion. The IRS added a yes/no question to the front of Form 1040 (as of 2019): "At any time during 2024, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset?" Answering dishonestly is signing a false return under penalty of perjury.

The IRS receives information from US exchanges via Form 1099-K (for payment processors) and, starting in 2025, Form 1099-DA for digital asset sales. Even without a 1099, the IRS can subpoena exchange records (it has served John Doe summonses to Coinbase, Kraken, and others) and use blockchain analysis to trace wallets.

Holding cryptocurrency without selling, trading, or spending it is not taxable. Buying Bitcoin and keeping it in your wallet for years generates no tax bill until you dispose of it.

However, you must keep records of transfers to avoid double-reporting or lost basis. If you transfer 2 ETH from Exchange A to your Ledger, then later sell from the Ledger, you need to prove the same coins moved (not a new acquisition).

The IRS expects contemporaneous records of every transaction. At minimum, maintain: date and time of each acquisition and disposal, type and amount of crypto, USD value at transaction time, cost basis, the nature of the transaction (sale, trade, payment, reward), and the wallet addresses or exchange accounts involved.

Keep records for at least three years after filing (the standard IRS audit window), or six years if you underreported income by more than 25%, or indefinitely if you did not file. For large portfolios, dedicated crypto tax software maintains an ongoing ledger, reconciling transfers and calculating basis across tax years.

Do I have to report crypto if I only bought and held it all year?

No. Buying cryptocurrency with USD and holding it without selling, trading, or spending creates no taxable event and no reporting requirement, though you must answer "yes" on Form 1040's digital asset question if you received any crypto during the year (even as a gift or airdrop).

Is trading one cryptocurrency for another taxable?

Yes. The IRS treats crypto-to-crypto trades as taxable exchanges.

How do I handle cryptocurrency I received from staking or mining?

What if I lost access to my crypto or it was stolen?

If cryptocurrency becomes worthless or is stolen, you may claim a capital loss, but you need documentation: a police report, exchange bankruptcy notice, or proof the wallet is irrecoverable. The loss is recognized when it becomes evident you cannot recover the coins, not necessarily in the year of the theft.

Can I deduct transaction fees and gas fees on my crypto taxes?

Yes. Transaction fees and network gas fees paid to buy crypto add to your cost basis, reducing your gain when you sell.

What is the penalty for not reporting cryptocurrency on my tax return?