Crypto Tax FAQ

Yes. The IRS treats cryptocurrency as property under Notice 2014-21, not as currency. You generally owe U.S. tax whenever you sell crypto, trade one cryptocurrency for another, spend crypto on goods or services, or earn crypto through staking, mining, airdrops, or as payment.

Each of these events can trigger a taxable gain, loss, or ordinary income that must be reported on your federal return. Every individual Form 1040 also includes a digital asset question that must be answered "Yes" or "No" – signed under penalty of perjury.

As property. The IRS first articulated this in Notice 2014-21 and has reaffirmed it in subsequent guidance, including Revenue Ruling 2019-24 (hard forks), Revenue Ruling 2023-14 (staking rewards), and the 2024 final regulations on digital asset broker reporting.

Practically, this means crypto is taxed similar to stock or other capital assets: dispositions generate capital gains or losses, while earning crypto is ordinary income at fair market value on receipt.

Taxable events fall into two buckets:

Dispositions – selling crypto for U.S. dollars, swapping one token for another, or spending crypto on goods or services – produce a capital gain or loss equal to proceeds minus your cost basis.

Receipts – earning crypto through staking, mining, airdrops, payment for services, or a hard fork allocation – are ordinary income at fair market value on the date received.

Buying crypto with U.S. dollars is not taxable, and moving crypto between wallets you control is not taxable.

It depends on whether the gain is short-term (held one year or less) or long-term (held more than one year).

Short-term capital gains are taxed at ordinary income rates – 10%–37% depending on your bracket – plus any applicable state tax and the 3.8% Net Investment Income Tax.

Long-term capital gains are taxed at 0%, 15%, or 20% federally based on income, plus state tax and NIIT.

NFTs that qualify as "collectibles" can be taxed at a higher long-term rate of up to 28%.

Yes, in some cases. Simply holding crypto you purchased with U.S. dollars is not a taxable event, but you still must answer the digital asset question on Form 1040.

If you earned crypto through staking, mining, airdrops, or as payment – even if you haven't sold it – that's ordinary income reportable in the year you received it. You also need to report token swaps, NFT purchases or sales, and any other dispositions, even if you didn't cash out to U.S. dollars.

No. Moving crypto between wallets you own and control is not a disposition because you still hold the same asset. The transfer is not a taxable event.

However, the transfer still has to be tracked accurately so your cost basis and holding period carry over correctly. Mislabeled wallet-to-wallet transfers are one of the most common sources of overstated gain and incorrect tax filings – many automated crypto tax tools default to treating an unknown transfer-out as a sale at zero basis, which can dramatically inflate your tax bill if not corrected.

You need a unified record of every acquisition (cost basis and date), every disposition (proceeds and date), and every transfer between your accounts.

Most clients use a combination of exchange transaction histories (CSV exports), wallet addresses queried on block explorers, and a crypto tax software platform that ingests both. The platforms reconcile transfers, identify income events, and produce Form 8949-ready reports – but the output is only as good as the input. Missing wallet addresses or unlabeled transfers are the most common reasons returns have to be redone.

The IRS defaults to First-In, First-Out (FIFO) – the earliest tokens you acquired are treated as the first ones sold. With adequate records, you may use specific identification, which permits methods like Highest-In, First-Out (HIFO) that select higher-basis tokens first to minimize gain.

Starting with the 2025 tax year, basis must be tracked wallet-by-wallet rather than via universal pooling, per Rev. Proc. 2024-28. The wallet-by-wallet method means specific identification choices apply within each wallet rather than across all your holdings – so the same token held in two wallets has separate basis pools, and a method selected in one wallet does not bind another.

Gas fee treatment depends on what the fee was used for:

Acquiring a token or minting an NFT – the gas fee is generally added to the cost basis of the new asset.

Selling or swapping a token – the gas fee generally reduces the sales proceeds. Both treatments lower the resulting capital gain (or increase the loss).

Transferring crypto between your own wallets – gas fees are typically not deductible (treated as personal expenses) because no disposition of the underlying asset occurs. This is a fact-specific area where some practitioners take alternate positions, and the IRS has not issued definitive guidance.

Lost access to a wallet (forgotten seed phrase, dead hardware wallet) does not itself create a tax event because you still legally own the crypto – you just can't access it.

The IRS has not issued specific guidance treating lost crypto as a deductible loss. If you can prove the crypto is genuinely unrecoverable, you may have a worthlessness argument, but the bar is high and treatment is fact-specific. For tax planning purposes, we generally do not assume a deduction is available for lost wallet access.

Under IRS Revenue Ruling 2023-14, staking rewards are taxable as ordinary income at fair market value on the date you gain "dominion and control" over them – typically when the rewards are credited to your wallet and can be transferred, sold, or otherwise used.

That fair market value also becomes your cost basis when you later sell or dispose of those tokens, which produces a separate capital gain or loss at that point. Rewards from liquid-staking derivatives and re-staking arrangements raise additional questions and should be analyzed individually.

Mining rewards are ordinary income at fair market value on the date received.

If you mine as a business – meaning regular, continuous activity with profit motive – the income is also subject to self-employment tax, but you can deduct mining-related expenses (electricity, equipment depreciation, hosting fees). Hobby miners report the income but cannot deduct expenses.

The fair market value at receipt becomes the cost basis for the mined tokens going forward.

Generally as ordinary income at fair market value when you have dominion and control over the tokens. The IRS addressed airdrops following a hard fork in Revenue Ruling 2019-24: ordinary income on the date the airdropped tokens are credited and accessible.

The same principle applies to marketing drops and retroactive token distributions (UNI, ARB, OP, etc.) – income is recognized when you can transfer, sell, or use the tokens, not necessarily when they were first allocated. If you couldn't access the tokens until later (e.g., a token wasn't transferable on day one), the recognition date is the date of transferability.

New tokens received in a hard fork are ordinary income at fair market value on the date of receipt, per Revenue Ruling 2019-24. The classic example is the Bitcoin Cash fork from Bitcoin in 2017.

If your existing crypto receives the new token automatically through an exchange or your wallet, income is recognized when the tokens are credited to your account.

An NFT sale produces a capital gain or loss based on the difference between sales proceeds and your cost basis. Holding period determines short-term vs. long-term treatment.

NFTs that meet the IRS definition of a collectible – described in the IRS's 2023 proposed look-through guidance (Notice 2023-27) – can be taxed at a higher long-term capital gains rate of up to 28%. Many art and PFP-style NFTs would likely be collectibles; utility-focused NFTs may not be. Treatment is fact-specific.

Creators and minters generally recognize ordinary income when they sell or transfer an NFT for value. If you're operating as a business (an artist with regular sales), the income is also subject to self-employment tax.

Creator royalty income from secondary sales is ordinary income, taxable in the year payable. Gas fees paid to mint are generally added to basis if the NFT is held, or treated as a business expense for creators.

DeFi activity often produces multiple taxable events:

Swapping one token for another is a disposition. Providing or withdrawing liquidity from an AMM pool can be a taxable disposition depending on the protocol mechanics. Receiving yield, governance tokens, or rebase rewards is generally ordinary income. Wrapping and unwrapping tokens is technically a swap and arguably a disposition, though there is no definitive IRS guidance on this.

Because DeFi protocols vary widely, the correct tax treatment depends on the specific mechanics of each transaction.

Yield farming generates ordinary income when reward tokens are received, at fair market value on receipt. The underlying liquidity provision and unstaking may also create dispositions, depending on the protocol.

Total tax exposure can be higher than the apparent yield because you may owe income tax in U.S. dollars even when the reward token's value drops before you sell.

The IRS has not issued definitive guidance.

A conservative view treats wrapping and unwrapping as a disposition of one token in exchange for another, producing a taxable gain or loss. A less conservative view treats wrapped tokens as a custodial wrapper of the same underlying asset, with no realization.

Most crypto tax software defaults to treating wrap and unwrap as taxable. The right answer depends on the specific protocol and the taxpayer's risk tolerance.

Yes. Paying for goods or services with crypto is a disposition of the crypto, producing capital gain or loss equal to the fair market value at payment minus your cost basis.

The dollar value of the purchase is irrelevant to gain calculation – only the crypto's gain matters. The merchant's receipt of crypto is separately income to them at fair market value.

This makes everyday crypto spending more complicated than it looks; many holders avoid spending appreciated crypto for this reason.

Each crypto-to-crypto trade is a taxable disposition. You're treated as selling the first token at fair market value (creating gain or loss against its cost basis) and then buying the second token with the proceeds (which becomes the cost basis of the new token).

There is no like-kind exchange treatment for crypto under current law – Section 1031 was limited to real property starting in 2018.

Crypto received as payment for goods or services is ordinary income at the fair market value on the date received. That fair market value becomes the cost basis of the crypto.

When the business later sells or spends the crypto, any gain or loss from the change in value between receipt and disposition is treated as a separate capital event. Businesses accepting crypto need to track each receipt and disposition individually – sales tax and 1099 reporting obligations may also apply.

Margin trading and futures positions generally produce capital gain or loss when the position is closed. If your account is force-liquidated by the exchange because your collateral fell below the maintenance threshold, the IRS treats the forced liquidation as a taxable sale of the collateral at its market value at the moment of liquidation.

A counterintuitive consequence: a devastating liquidation can trigger a taxable capital gain if the liquidated collateral had a low original cost basis. The drawdown is real economic loss, but the tax event is a gain.

Cryptocurrency derivatives traded on regulated U.S. futures exchanges (CFTC-regulated contracts) may qualify for special 60/40 treatment under IRC § 1256, but most retail crypto futures and perpetuals traded on offshore venues do not.

Form 8949 (Sales and Other Dispositions of Capital Assets) is where you report each individual crypto disposition: the asset, acquisition date, disposition date, proceeds, cost basis, and resulting gain or loss. Totals flow to Schedule D.

Crypto transactions are reported separately from securities and require detailed per-transaction records. Active crypto traders can have hundreds or thousands of Form 8949 entries in a year, which is why crypto tax software is generally required to prepare them accurately.

Form 1099-DA is the IRS information return that U.S. digital asset brokers are required to issue for digital asset sales beginning with the 2025 tax year (first reported in early 2026). It reports gross proceeds in 2025 and adds cost basis reporting starting in 2026.

The form applies to centralized exchanges and certain custodial brokers – it does not capture on-chain DeFi activity, peer-to-peer transfers, or self-custodied wallet transactions. Taxpayers still need to maintain complete records of off-broker activity.

Form 1040 includes a yes/no question near the top: during the tax year, did you receive, sell, exchange, or otherwise dispose of a digital asset, or have a financial interest in one?

Buying crypto with U.S. dollars and holding it is the only common scenario in which the answer is "No." Most active crypto users will need to answer "Yes." The question is signed under penalty of perjury, and the IRS has flagged it for enforcement attention.

As of current guidance, FinCEN has signaled that crypto held in foreign exchange accounts may eventually be subject to FBAR reporting, but the rule has not been finalized.

Cryptocurrency on its own (in self-custody wallets) is not FBAR-reportable today. Foreign exchange accounts that hold both cash and crypto are FBAR-reportable if they exceed $10,000 in aggregate value because of the fiat cash, regardless of whether the crypto portion is technically covered. This area is actively evolving – confirm current rules each year.

The U.S. tax system is pay-as-you-go. If you expect to owe at least $1,000 in tax when you file your return – common for taxpayers with significant crypto gains, staking income, or mining income – you may be required to make quarterly estimated tax payments.

The safe harbor rule generally allows you to avoid underpayment penalties if your withholding plus estimated payments cover at least 100% of last year's total tax (or 110% for higher earners with adjusted gross income above $150,000), or 90% of the current year's projected tax. Underpayment penalties accrue even if you pay the full balance by April 15.

The IRS sends several types of crypto-related letters – most commonly Letter 6173, Letter 6174, and Letter 6174-A. Receiving any of them means the IRS has matched your identity to records received from a centralized exchange (Coinbase, Kraken, Gemini, etc.). It does not necessarily mean you are being audited.

Each letter signals a different posture:

Letter 6174 is informational only; no response is required, but you should self-check your prior returns.

Letter 6174-A indicates the IRS believes you may have unreported activity; no formal response is required, but inaction increases audit risk.

Letter 6173 requires a written response under penalty of perjury within the deadline stated. Ignoring it can escalate to examination.

The right step is to review your prior returns for any unreported crypto activity, amend prior years where needed using Form 1040-X, and respond on time if the letter requires it. Working with an Enrolled Agent or CPA experienced in crypto tax is recommended given the stakes.

Yes. Capital losses from selling or disposing of crypto offset capital gains dollar-for-dollar. For individual taxpayers, net capital losses exceeding gains may offset up to $3,000 of ordinary income per year, with any remainder carried forward indefinitely. Corporate taxpayers may only carry capital losses back three years or forward five years to offset capital gains, they cannot deduct net capital losses against ordinary income.

Losses from worthless tokens, theft, or rug-pulls have different and more restrictive rules and require careful analysis to claim correctly.

Personal theft losses are generally not deductible under the Tax Cuts and Jobs Act (TCJA) for tax years 2018–2025, except in federally declared disaster areas.

Rug pulls where the token still trades may produce a deductible capital loss if you sell the remaining position. Investment scams may qualify as theft losses to the extent allowed under IRC § 165, but the standard is high, requires proof of criminal intent under state law, and is fact-specific.

A "worthless security" deduction under IRC § 165(g) doesn't clearly apply to crypto, because crypto isn't a security.

To claim a worthlessness loss for a token, you generally need a clear abandonment or dispositive event – selling for $0.01 or a dust amount on-chain creates a clean disposition. Without an actual sale or abandonment, the IRS position is that you still hold the asset and have not realized a loss.

Crypto held in a bankrupt exchange is not deductible until you have a definitive loss – typically when the bankruptcy proceedings conclude and you receive your final distribution.

Once the final recovery is known, the difference between your cost basis and the recovery is generally a capital loss (long-term or short-term depending on holding period). Treatment as a theft loss is unlikely to qualify under TCJA limitations.

Yes, and crypto has historically had a structural advantage: the wash sale rule under IRC § 1091 applies only to "stock or securities," and the IRS has not formally extended it to crypto.

This means you can sell a crypto asset at a loss and repurchase the same asset shortly afterward, realizing the loss for tax purposes while maintaining exposure to the asset. Congress has considered extending the wash sale rule to digital assets in recent legislative sessions, so the strategy may not last forever. Confirm current law each year.

Gifts of crypto are not income to the recipient. The recipient takes the donor's cost basis and holding period (a "carryover basis" rule). The donor may need to file a gift tax return (Form 709) if the gift exceeds the annual exclusion.

Inherited crypto receives a stepped-up basis to fair market value at the date of death (or alternate valuation date), and the holding period is automatically long-term – generally the most favorable treatment available for appreciated crypto.

Yes – donating crypto can be highly tax-advantaged. If you donate cryptocurrency held more than one year directly to a registered 501(c)(3) charity, you generally pay no capital gains tax on the appreciation and can deduct the full fair market value on your itemized tax return.

If you donate crypto held one year or less, your deduction is limited to your cost basis rather than fair market value.

Important administrative requirements: donations exceeding $500 require attaching Form 8283 to your return, and donations over $5,000 generally require a qualified appraisal – an appraisal specifically prepared for charitable contribution purposes, not a screenshot of an exchange price. The charity must also acknowledge the donation in writing.

Yes, under specific structures. Trading cryptocurrency inside a Self-Directed IRA (SDIRA) or certain self-directed 401(k) plans does not trigger taxable events at the trade level. In a Traditional IRA, gains grow tax-deferred until distribution. In a Roth IRA, gains can grow tax-free for qualified distributions.

A few important caveats apply. IRA assets must be held by a qualified custodian, personal custody is not permitted. Contributions must be made in cash; you cannot transfer crypto you already own directly into an IRA. Annual contribution limits apply normally.

Certain activities inside the IRA, including staking or leveraged investments can generate Unrelated Business Taxable Income (UBIT) that the IRA itself owes tax on, even though ordinary trading does not. UBIT rules around staking remain an active area, and the optimal structure depends on the planned activity.

Both. Most clients have a mix of traditional income (employment, business, investments) and crypto activity. We prepare full U.S. individual and business returns so your crypto reporting and traditional reporting are coordinated in a single coherent filing – not split across two providers.

CryptoAxis is based in Los Angeles, California, and serves clients worldwide. Because U.S. federal tax follows the taxpayer (not their physical location), and U.S. state tax follows the client's state of residence where applicable, geographic distance is not a barrier. We work with U.S. domestic clients in every state, U.S. citizens and residents living abroad, and international clients with U.S. tax obligations.

CryptoAxis was founded by Joelle Azwat, an IRS Enrolled Agent (EA) with a CPA background in public accounting. Joelle spent five years at PwC in U.S. tax services and later worked at TRES Finance, a crypto accounting and reporting platform.

She has been featured in International Business Times and published commentary on staking taxation. Clients work directly with the founder.

A complete list of every exchange and wallet you've used, transaction histories (CSV exports from each exchange), wallet addresses for on-chain queries, prior year tax returns, and basic income documentation (W-2, 1099s, K-1s) for any traditional income.

The initial free consultation is used to scope the engagement and identify exactly what data we'll need.

Engagements are scoped based on complexity – number of exchanges and wallets, volume of transactions, DeFi/NFT activity, and whether traditional tax reporting is part of the engagement.

We provide a fixed fee quote after the initial consultation so there are no billing surprises. Schedule a free 30-minute consultation to discuss your situation.