As the end of the year approaches, it’s a good time to make sure your tax office is in order. This is especially important for crypto investors given the new IRS intermediary reporting requirements for transactions after January 1, 2025.
The IRS typically treats virtual currencies as assets similar to stocks and real estate, so selling virtual currencies can result in capital gains or losses. And while crypto investors should always have a good record, new reporting requirements have given them an even more compelling reason to do so. That’s because brokerages now have to submit what’s called a Form 1099-DA. For tax year 2025, brokers will be required to report gross revenue for each sale of digital assets they process. Starting in 2026, brokers will be required to report gross income and cost basis information for covered securities.
Rick Edelman, a financial advisor, author, and founder of the Digital Asset Council of Financial Professionals, said tax fraud was easier because brokers weren’t required to issue 1099s to sell or exchange cryptocurrencies. “Many people have a mistaken belief that there is no reporting requirement,” Edelman said.
As virtual currency investors make tax plans for the year, Bitcoin Having soared to new heights, but recently endured a significant drop that took more than $40,000 off its record price, it’s important to understand the new, stricter record-keeping requirements.
Let’s say you bought Ethereum for $1,500 and paid a $50 transaction fee. According to the example provided, the cost basis would be $1,550. coinbase. “Essentially, your gain or loss is the difference between your total return and your cost basis. If you sold that 1 ETH for $2,000, your taxable gain would be $450 ($2,000 – $1,550).”
Get your crypto recordkeeping in order now
Brokers will be required to report cost basis information for tax year 2026, and if they have not previously kept proper records, they should start doing so. “It is the taxpayer’s responsibility to track and substantiate the cost basis they submit,” said Daniel Hauff, senior manager of tax policy and advocacy at the American Institute of Certified Public Accountants.
For many crypto investors, this will be complicated, especially if they transfer their tokens to a broker after holding them elsewhere and do not keep careful records. In that case, the broker does not have the amount you purchased the cryptocurrency from. The broker will only know the price when you send it, Hauf says.
Ideally, taxpayers should try to resolve these issues now before the broker is required to report the basis, which may require consulting a qualified tax professional.
Cryptocurrency investors who have tracked their holdings haphazardly in the past should also consider hiring a crypto recordkeeping provider for tax purposes. There are many of these services, including ProfitStance, Taxbit, TokenTax, and ZenLedger.
Edelman said it’s best to use a records management provider because of the complexity involved. “If you try to do this manually, it’s complicated and prone to mistakes,” he said.
Cryptocurrency staking and ETF staking will be a major focus for tax purposes
Although the IRS issued core guidance on the tax treatment of virtual currencies over a decade ago, the market has changed significantly since then, highlighting the need for updated guidance in several areas.
In 2024, the IRS stated in Notice 2024-57 that it continues to study various types of cryptocurrency transactions to determine appropriate taxation. This leaves many taxpayers at a loss and wondering how to report certain types of transactions. The IRS has said it will not impose penalties on certain types of transactions while regulations are improved, but taxpayers still need to keep careful records to ensure proper accounting.
One area where crypto investors are waiting for guidance is staking transactions. Edelman said guidance for this and other more complex crypto transactions is expected to be released next year. Some proponents argue that taxes should only be applied when these rewards are consumed, sold, or otherwise disposed of. But so far, the IRS has said these rewards should be taxed as income when they are received, Hauf said.
Zach Pandle, head of research at Grayscale, an investment platform focused on digital assets, said additional guidance on staking could be especially important now that the IRS has confirmed that issuers of exchange-traded funds can offer staking rewards. The availability of cryptocurrencies within ETFs expands the opportunity for retail investors to gain exposure to the asset class, and the latest guidance suggests that more investors will face tax implications from staking rewards. “Staking rewards are becoming increasingly popular for investors as they are enabled in ETFs,” Pandol said.
A significant drop in Bitcoin prices could be advantageous for tax purposes.
For some crypto investors, there may be an opportunity to recover tax losses in the next month or so, Pandol said. Loss recovery means selling an investment at a loss and using that loss to offset gains on other investments.
Bitcoin has struggled since reaching record highs in October, but depending on when the cryptocurrency was purchased, investors may have the opportunity to benefit from a tax perspective. Some investors may also benefit from tax gain harvesting, a strategy that involves selling investments when the tax implications are believed to be least.
“Now is the time to think about it and plan for it,” said Stuart Alderroti, president of the National Cryptocurrency Association, a nonprofit focused on crypto education. “You can harvest profits, you can harvest losses,” he said.
Many accountants don’t understand digital assets
Taxation depends primarily on an individual’s tax bracket and whether it is a short-term or long-term gain. For example, if you hold a cryptocurrency for more than a year, your gains are subject to long-term capital gains rates of 0%, 15%, or 20%. If the cryptocurrency is held for less than one year, regular tax rates of 10% to 37% apply.
Due to the complexity and unique nature of cryptocurrencies, tax decisions are complicated by other factors, especially since IRS rules regarding cryptocurrencies are in flux. As an example, it is important to report virtual currency transactions in the correct form. For example, use Form 8949 if you sell, exchange, or otherwise dispose of digital assets that you held as capital assets. If you were paid for digital assets as an employee or independent contractor, report your digital asset income on Form 1040 (U.S. Individual Income Tax Return).
In addition, many cryptocurrency owners are confused about federal income tax issues regarding digital assets. Near the top of the first page, you are asked to identify whether you received, sold, exchanged, or otherwise disposed of any digital assets (as compensation, prizes, or payments for property or services) at any time during the tax year.
Many people think that “received” means a purchase, but that’s not the case, Edelman said. Rather, the IRS says that in connection with a hard fork, it refers to digital assets received for payments for property or services rendered, rewards or winnings, mining, staking and similar activities, or airdrops.
Be sure to consult a cryptocurrency-savvy tax advisor regarding these and other issues regarding cryptocurrency taxation. “Most accountants don’t, because they’re not trained in this area,” Edelman says.
