Cryptocurrency Taxes: What Crypto Investors Actually Need to Know About Reporting Bitcoin, NFTs, and DeFi
Bought Bitcoin, traded some Ethereum, maybe picked up a few NFTs? The IRS wants to know about it. Cryptocurrency isn't some tax-free zone where gains magically escape taxation. Every trade, every sale, every swap between coins triggers a taxable event that you're supposed to report.
Most crypto investors get blindsided by taxes. You bought Bitcoin at $30k, sold at $60k, thought you made $30k profit. When tax time comes, you see that profit is taxed. Also, all the trades you made between different coins count as taxable events. Suddenly you owe way more than expected.
This guide explains how cryptocurrency taxes work. It covers what you need to report and how to calculate gains and losses. It also shows how to avoid mistakes that can get crypto investors in trouble with the IRS.
The IRS Treats Crypto as Property, Not Currency
The fundamental thing to understand: the IRS classifies cryptocurrency as property, similar to stocks or real estate. This means every time you sell, trade, or use crypto, it's a taxable event where you need to calculate gain or loss.
This is different from how you might think about crypto. You might see it as digital money, but tax-wise it's treated like trading baseball cards or stocks. Sell Bitcoin for dollars? Taxable. Trade Bitcoin for Ethereum? Also taxable. Buy a Tesla with Bitcoin? Yep, taxable.
Each transaction requires you to figure out your cost basis (what you paid for the crypto) and your proceeds (what you got for it). The difference is your capital gain or loss.
Every Crypto Transaction That Triggers Taxes
Let's break down exactly which crypto activities create tax obligations.
Selling Crypto for Cash
This one's obvious. Sell Bitcoin, Ethereum, or any cryptocurrency for dollars and you have a taxable gain or loss. Buy Bitcoin at $40,000, sell it for $55,000, and you have a $15,000 capital gain to report.
The gain gets taxed at short-term rates (same as your regular income tax rate) if you held the crypto less than a year. Hold it over a year and you get long-term capital gains rates, which top out at 20% federal plus the 3.8% net investment income tax for high earners.
Trading One Crypto for Another
This catches a lot of people. Trade Bitcoin for Ethereum? That's a taxable event. Swap Ethereum for Solana? Taxable. Exchange any cryptocurrency for any other cryptocurrency and you need to calculate gain or loss on the crypto you're giving up.
Before 2018, some people argued crypto-to-crypto trades qualified as like-kind exchanges under Section 1031. That loophole closed. Now every trade between different cryptocurrencies is taxable.
Even stablecoin trades count. Sell volatile crypto for USDC thinking you're just moving to cash? The IRS treats that as a sale triggering capital gains or losses.
Spending Crypto on Purchases
Use Bitcoin to buy something - a car, a pizza, NFTs, anything - and you're technically selling that Bitcoin for the fair market value of what you bought. This triggers capital gains tax on any appreciation since you acquired the Bitcoin.
Buy Bitcoin at $30,000, later use it to purchase a $50,000 car when Bitcoin is worth $50,000, and you have a $20,000 capital gain even though you never converted to dollars.
This makes using crypto for everyday purchases a tax nightmare. Every coffee you buy with Bitcoin requires tracking the cost basis of that Bitcoin and calculating gain or loss. Most people don't want that hassle, which is why crypto hasn't really caught on for routine spending.
Receiving Crypto as Income
Get paid in cryptocurrency for work? That's ordinary income taxed at regular income tax rates based on the fair market value when you receive it. Freelancer gets paid 0.5 ETH when Ethereum is trading at $3,000? That's $1,500 in ordinary income.
The crypto's value at the time you receive it becomes your cost basis. If you later sell that Ethereum for $3,500, you have an additional $500 capital gain.
This applies to any crypto received as payment for goods or services, including mining rewards if you're running a mining operation as a business.
Mining Cryptocurrency
Mine cryptocurrency and you have income equal to the fair market value of the coins when you successfully mine them. This gets taxed as ordinary income, and if you're mining as a business (not just hobby mining on one computer), you also owe self-employment tax.
Your cost basis in mined coins equals their value when mined. Sell them later for more and you have capital gains. Sell for less and you have capital losses.
Mining also creates business deductions. The cost of mining equipment, electricity, cooling, internet, and space used for mining can offset mining income if you're treating mining as a business.
Staking Rewards and Yield Farming
Receive rewards from staking or yield farming? The IRS hasn't issued crystal-clear guidance on this, but the conservative position is that staking rewards are taxable income when you gain control over them, valued at their fair market value at that time.
This creates problems for people heavily involved in DeFi. You might be earning small amounts of rewards constantly, and tracking the value of each reward at the exact moment you receive it becomes extremely tedious.
Some tax pros argue you don't have income until you sell or otherwise dispose of staking rewards, similar to how mining a block doesn't create income until you gain control of the reward. But this is aggressive and risks IRS disagreement.
Airdrops and Hard Forks
Receive cryptocurrency from an airdrop? That's income equal to the fair market value when you receive it and can access it. Same with hard forks - when a blockchain splits and you end up with new coins, that's taxable income.
The tricky part is determining when you "receive" airdropped coins. Is it when they hit your wallet, or when you can actually access and control them? If you can't access them yet, you probably don't have income until you can.
Some airdrops are clearly promotional giveaways - income when received. Others are part of protocol governance - potentially not income until you sell, though this is unclear.
What Doesn't Trigger Taxes
A few crypto activities don't create immediate tax obligations:
Buying crypto with cash doesn't trigger taxes. You're just acquiring property. Transferring crypto between your own wallets doesn't trigger taxes. Moving Bitcoin from Coinbase to your hardware wallet is just moving your property around.
Donating cryptocurrency to qualified charities doesn't trigger capital gains tax (and you get a deduction for the fair market value if you held it over a year). This is actually a great tax strategy if you have highly appreciated crypto.
How to Calculate Your Crypto Gains and Losses
Calculating crypto gains and losses means tracking cost basis for every coin and matching it to your proceeds when you dispose of it.
Determining Cost Basis
Your cost basis in cryptocurrency is what you paid for it, including fees. Buy 1 Bitcoin for $40,000 plus $50 in fees, your basis is $40,050.
For crypto received as income (mining, staking, payment for work), your basis is the fair market value when you received it.
The challenge comes when you've bought the same cryptocurrency multiple times at different prices. You have 3 Bitcoin purchased at $30k, $40k, and $50k. You sell 1 Bitcoin. Which one did you sell?
The IRS lets you use specific identification - you can designate which exact coin you're selling as long as you can adequately identify it at the time of sale. Most people use FIFO (first in, first out) where the oldest coins are treated as sold first.
Calculating Gains and Losses
Take your proceeds (what you sold for) minus your cost basis (what you paid). The result is your capital gain or loss.
Sell Bitcoin you bought for $35,000 for $50,000 and you have a $15,000 gain. Sell Ethereum you bought for $3,000 for $2,000 and you have a $1,000 loss.
Short-term gains (held one year or less) are taxed at ordinary income rates. Long-term gains (held over one year) get preferential capital gains rates.
Track holding periods carefully. Buy Bitcoin on January 10, 2025 and sell it on January 10, 2026 - that's exactly one year but it's short-term. You need to hold it until at least January 11, 2026 for it to be long-term.
The Wash Sale Rule Problem
The wash sale rule prevents you from claiming a loss on stock sales if you buy substantially identical stock within 30 days before or after the sale. This rule currently doesn't apply to cryptocurrency because crypto is property, not securities.
This creates a tax strategy: you can sell crypto at a loss to harvest the tax loss, then immediately buy it back. Sell Bitcoin at a loss, buy it right back, and you get to claim the loss without actually exiting your position.
But watch for future changes. Congress has proposed extending wash sale rules to crypto. If that passes, the strategy stops working.
Cost Basis Tracking Nightmares
If you made hundreds or thousands of crypto trades, calculating cost basis for each one manually is basically impossible. You need software.
Exchanges like Coinbase provide some transaction history, but if you've used multiple exchanges, DeFi protocols, wallets, and platforms, assembling a complete picture of all your transactions requires serious effort.
Common Crypto Tax Mistakes
Here's where crypto investors typically mess up their taxes.
Not Reporting Crypto-to-Crypto Trades
The most common mistake: thinking only crypto-to-cash sales are taxable. Every trade between different cryptocurrencies is a taxable event requiring gain/loss calculation.
Trade Bitcoin for Ethereum, then Ethereum for Solana, then Solana back to Bitcoin, and you've created three taxable events even though you ended back where you started.
Losing Track of Cost Basis
Buy crypto on multiple exchanges, move it around different wallets, use some for trades, and you can easily lose track of what you originally paid. Without accurate cost basis records, you can't properly calculate gains and losses.
The IRS requires you to maintain adequate records. If you can't prove your cost basis, the IRS can treat the entire proceeds as gain with zero basis.
Forgetting About DeFi Transactions
Interact with DeFi protocols - lending, borrowing, yield farming, liquidity pools - and each interaction can trigger taxes. Deposit crypto into a liquidity pool? Potentially taxable. Withdraw it? Another taxable event. Claim rewards? Income.
Many DeFi users don't realize these activities create tax reporting obligations until they get tax software and it flags hundreds of unreported transactions.
Not Reporting Small Amounts
Some people figure small crypto amounts don't matter. Made $300 in crypto gains? That's still taxable income that belongs on your return. The IRS doesn't have a minimum threshold below which gains are tax-free.
With the IRS increasingly focused on crypto compliance, assuming small amounts won't get noticed is risky.
Using Crypto Tax Forms Incorrectly
Crypto transactions get reported on Form 8949 and Schedule D, the same forms used for stock sales. Each transaction needs its own line showing date acquired, date sold, proceeds, cost basis, and gain or loss.
If you have hundreds of transactions, you're not typing each one individually. You summarize them and attach a statement or use tax software that handles this correctly.
How the IRS Tracks Cryptocurrency
The IRS knows about your crypto. They've been working on this for years.
Exchange Reporting
Major cryptocurrency exchanges like Coinbase send Form 1099-K or similar forms to users who exceed certain transaction thresholds. Starting with the 2025 tax year, exchanges must send Form 1099-DA showing your crypto transactions.
The IRS receives copies of these forms. If you don't report crypto sales that the exchange reported to the IRS, you're likely to get a notice.
Blockchain Analysis
The IRS has tools to analyze blockchain transactions. Bitcoin and most cryptocurrencies operate on public blockchains where all transactions are visible. The IRS and other agencies have software that can trace transactions and link wallet addresses to individuals.
Privacy coins like Monero are harder to trace, but most popular cryptocurrencies leave a traceable record.
The Tax Return Question
Every Form 1040 asks: "At any time during 2026, 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?" This question sits at the top of the return where you can't miss it.
Checking "no" when you actually did transact in crypto is lying on your tax return. That's not something to do lightly.
Reporting Crypto on Your Tax Return
Here's the actual mechanics of reporting cryptocurrency transactions.
Form 8949 and Schedule D
Capital gains and losses from crypto get reported on Form 8949, which flows to Schedule D. Each sale or exchange gets reported showing:
Description of property (e.g., "1 Bitcoin")
Date acquired
Date sold
Proceeds
Cost basis
Gain or loss
With many transactions, you summarize them rather than listing each individually. Tax software handles this.
Income from Mining or Staking
Crypto received as income (mining, staking rewards, payment for work) gets reported as ordinary income. Self-employed miners report on Schedule C. Staking rewards might go on Schedule 1 as other income.
Information Returns from Exchanges
Check your exchanges for Forms 1099-B, 1099-K, or the new 1099-DA. These show what the exchange reported to the IRS about your transactions. Your tax return needs to match what the exchanges reported, or explain differences.
Crypto Tax Software and Tools
Unless you made only a handful of trades, you need software to track crypto transactions and calculate taxes.
Popular Crypto Tax Software
CoinTracker, Koinly, CryptoTrader.Tax, TokenTax, and similar platforms connect to your exchange accounts and wallets, import transaction history, calculate gains and losses, and generate tax forms.
These tools aren't perfect. They struggle with complex DeFi transactions, sometimes misidentify transaction types, and may not capture everything if you've used obscure exchanges or protocols.
Expect to pay $50-200+ depending on transaction volume and features needed. The time saved versus manual calculation makes this worthwhile for active traders.
What You Need to Provide
Good records make crypto tax prep easier. You need:
Transaction history from all exchanges
Wallet addresses and transaction records
Records of transfers between wallets/exchanges
Information about any crypto received as income
Cost basis for coins purchased before you started tracking
Export transaction histories from exchanges before year-end. Some exchanges only keep limited history available.
Tax Strategies for Crypto Investors
Some legitimate ways to reduce crypto tax bills.
Tax-Loss Harvesting
Sell cryptocurrency at a loss to offset gains. Have $20,000 in gains from selling Bitcoin but also have Ethereum worth $8,000 less than you paid? Sell the Ethereum to realize the $8,000 loss, reducing your taxable gains to $12,000.
Since wash sale rules don't currently apply to crypto, you can buy the Ethereum right back if you want to maintain your position.
Long-Term vs. Short-Term Gains
Hold crypto over a year to qualify for long-term capital gains rates. The difference between short-term rates (up to 37% federal) and long-term rates (maximum 20% federal plus 3.8% net investment income tax) is significant.
If you're close to the one-year mark on profitable holdings, waiting a few more days to sell can save thousands in taxes.
Donating Appreciated Crypto
Donate cryptocurrency you've held over a year directly to charity and you get a deduction for the full fair market value without paying capital gains tax on the appreciation.
Bought Bitcoin for $10,000, now worth $40,000? Donate it directly to a qualified charity and you get a $40,000 deduction without paying tax on the $30,000 gain. Donating appreciated crypto is more tax-efficient than selling it and donating cash.
Offsetting Gains with Losses
Capital losses from crypto offset capital gains from any source - stocks, real estate, other investments. If you have $15,000 in stock gains and $10,000 in crypto losses, you can offset them to reduce taxable gains to $5,000.
Excess capital losses (over $3,000 per year) carry forward to future years.
State Taxes on Cryptocurrency
Don't forget state income taxes. Most states tax capital gains as ordinary income at whatever their income tax rate is.
California residents face state tax rates up to 13.3% on crypto gains. Texas and Florida residents pay no state income tax. Wyoming and several other states have enacted crypto-friendly laws but still tax capital gains as income if they have an income tax.
Some states are actively trying to attract crypto businesses with favorable tax treatment. Puerto Rico offers significant tax incentives for cryptocurrency investors who become bona fide residents.
When to Get Professional Help
Crypto taxes get complicated fast. Think about hiring a tax professional if you trade often with many transactions. This is especially true if you are deeply involved in DeFi protocols or mine cryptocurrency as a business. You should also consider this if you received large crypto gifts or inheritances. If you are dealing with NFTs and need to know if they are collectibles, a tax expert can help. If you are facing an IRS audit or notice about unreported crypto, get professional help. Lastly, if you made a lot of money in crypto and want to lower your taxes legally, a tax professional can assist you.
A CPA experienced with cryptocurrency can help navigate the unclear areas, ensure you're reporting everything correctly, and identify tax-saving strategies.
The IRS Is Watching Crypto Closely
The IRS has made cryptocurrency compliance a priority. They've sent thousands of letters to crypto users, obtained records from exchanges through court orders, and hired blockchain analysis firms to trace transactions.
Ignoring crypto taxes isn't a viable strategy. The IRS will eventually catch up, and the penalties for failing to report can be steep - especially if they determine it was intentional.
Working with WELFO on Cryptocurrency Taxes
We help crypto investors handle the tax complexity of digital assets. Services include calculating gains and losses from crypto transactions. We prepare Form 8949 and Schedule D. We report mining income and help with expense deductions. We analyze and report DeFi transactions. We handle tax treatment for NFT sales. We provide audit support for crypto-related IRS notices. We also offer tax planning to reduce cryptocurrency tax liability.
Whether you made a few crypto trades or you're deeply involved in DeFi, we can help you get your crypto taxes right.
WELFO
Phone: (279) 999-2788
Email: info@welfo.us
Website: welfo.us
We work with clients in English and Russian. Our team is professionally insured through the CNA/AICPA Insurance Program.
Call (279) 999-2788 or email info@welfo.us to discuss your cryptocurrency tax situation.