What You Need to Know About Cryptocurrency and Taxes
When you invest in cryptocurrency, you avoid scrutiny from centralized financial institutions like banks. However, that doesn’t mean you can avoid paying taxes. In fact, the IRS has been cracking down on cryptocurrency investors who fail to report their earnings.
Whether you’re a day trader or a first-time investor, here’s what you should know about cryptocurrency and taxes.
How Cryptocurrency Is Classified by the IRS
The IRS treats cryptocurrency as property, not currency. Whenever you sell, trade, or use crypto assets, you’re likely triggering a taxable event.
For example, if you bought one Bitcoin for $10,000 in 2023 and sold it for $30,000 in 2024, the $20,000 profit would be subject to capital gains tax.
Short-Term vs. Long-Term Capital Gains
The length of time you hold onto your cryptocurrency before selling or trading it can significantly impact how much tax you owe.
- Short-term gains: If you sell or trade cryptocurrency you’ve held for less than a year, any profit is taxed as ordinary income.
- Long-term gains: If you hold your crypto for more than a year, your profits are taxed at the more favorable long-term capital gains rates (0%, 15%, or 20%, depending on your income).
Common Crypto Tax Mistakes to Avoid
Now that you know how the IRS views crypto, let’s look at a few common crypto tax mistakes.
Not reporting gains from crypto-to-crypto trades
Many people mistakenly believe that they can trade one cryptocurrency for another without incurring any tax liability. However, according to the IRS, these transactions are taxable and must be reported on your tax return.
Not keeping detailed records
Every crypto transaction matters when it comes to taxes, so detailed records are critical.
Make sure to track the following info:
- Date of the transaction.
- Fair market value of the cryptocurrency in USD at the time of the trade.
- The purpose of the transaction (e.g., purchase, trade, or payment).
- Any transaction fees paid in crypto.
Misunderstanding Crypto Mining and Staking Income
If you’re earning cryptocurrency through mining or staking, be aware that this is considered taxable. The fair market value of the crypto when you receive it is added to your taxable income for the year.
Later, if you sell or trade the mined or staked crypto, you may owe capital gains tax on any appreciation.
Taxable Events vs. Non-Taxable Events
Here’s a quick breakdown of what qualifies as a taxable event and what doesn’t:
Taxable Events:
- Selling cryptocurrency for fiat currency (like USD).
- Trading one cryptocurrency for another.
- Using cryptocurrency to pay for goods or services.
- Earning cryptocurrency through mining or staking.
Non-Taxable Events:
- Buying cryptocurrency with fiat currency.
- Holding cryptocurrency in your wallet without selling or trading it.
- Transferring cryptocurrency between your own wallets.
The IRS Is Watching
The IRS is ramping up its crypto tax enforcement. A regulation enacted on Jan. 1, 2025, requires crypto brokers to keep track of your activity. They’ll report your earnings to the IRS using the newly created Form 1099-DA. Your personal tax return needs to align with the data reported by your crypto brokers, or you risk penalties and audits.
Additionally, you now have to use a wallet-by-wallet accounting method to calculate cost basis. Universal methods are no longer allowed.
Work With a Crypto-Savvy Tax Professional
Crypto tax rules can be complex, especially if you’re dealing with multiple wallets, exchanges, or DeFi platforms. At Kondler & Associates, CPAs, our team stays up to date on the latest IRS guidance and reporting requirements.
We can help you:
- Determine your crypto tax liability
- Maximize deductions and offset losses
- Stay compliant and avoid penalties
- Plan for future crypto investments with tax efficiency in mind
If you’re unsure how your cryptocurrency activity affects your tax return, don’t wait until tax season. Contact Kondler & Associates, CPAs today.
