Introduction
Cryptocurrency has become a mainstream investment, but many investors don’t realize that crypto transactions are taxable. The IRS requires reporting of crypto gains, losses, and income, and failure to do so can lead to penalties or audits.
This guide explains how cryptocurrency is taxed, which IRS forms to use, and strategies to reduce your tax liability in 2025.
Is Cryptocurrency Taxable?
Yes, the IRS treats cryptocurrency as property (IRC §1221), meaning it is subject to capital gains tax when sold, exchanged, or spent.
Taxable Crypto Transactions
- Selling crypto for cash – Taxable as a capital gain or loss.
- Trading one crypto for another – Considered a sale and taxable.
- Using crypto to buy goods/services – Taxable based on gain/loss at the time of purchase.
- Earning crypto (mining, staking, airdrops) – Taxable as ordinary income.
Non-Taxable Crypto Transactions
- Buying and holding cryptocurrency.
- Transferring crypto between your own wallets.
Action Step: Keep detailed records of all crypto transactions to calculate taxable events accurately.
How Crypto Gains and Losses Are Taxed
Short-Term vs. Long-Term Capital Gains Tax (IRC §1222)
- Short-term capital gains (held less than a year) – Taxed at ordinary income tax rates (10%-37%).
- Long-term capital gains (held over a year) – Taxed at 0%, 15%, or 20%, depending on income.
| Filing Status | 0% Tax Rate | 15% Tax Rate | 20% Tax Rate |
|---|---|---|---|
| Single | Up to $47,025 | $47,026 – $518,900 | Over $518,900 |
| Married Filing Jointly | Up to $94,050 | $94,051 – $583,750 | Over $583,750 |
Crypto Capital Losses Can Offset Gains (IRC §1211)
- If you sell crypto at a loss, you can use those losses to offset taxable gains.
- You can deduct up to $3,000 in capital losses per year against ordinary income.
Example:
- You sell Bitcoin for a $10,000 gain and Ethereum for a $5,000 loss.
- You only pay taxes on a $5,000 net capital gain ($10,000 – $5,000).
Action Step: Use Form 8949 and Schedule D (Form 1040) to report crypto sales and losses.
Crypto Mining, Staking, and Income Taxation
Mining Income (IRC §61)
- Taxed as ordinary income based on the fair market value (FMV) of mined crypto.
- Miners must report income on Schedule C (Form 1040) if mining is a business.
Staking Rewards & Airdrops (IRC §451)
- Staking rewards and airdrops are taxable as income when received.
- If later sold, capital gains tax applies based on the difference in price.
Action Step: Report mining and staking income on Schedule 1 (Form 1040) and capital gains on Form 8949.
Crypto Tax Reporting: IRS Forms You Need
| Transaction Type | Required IRS Form |
|---|---|
| Buying & Holding Crypto | No reporting required |
| Selling, Trading, or Using Crypto | Form 8949 & Schedule D (Form 1040) |
| Mining Income | Schedule C (Form 1040) |
| Staking Rewards & Airdrops | Schedule 1 (Form 1040) |
| Foreign Crypto Accounts | FinCEN Form 114 (FBAR) if balance exceeds $10,000 |
Crypto Tax Reduction Strategies
5.1 Hold Crypto for Over One Year
- Long-term capital gains tax rates are lower than short-term rates.
5.2 Harvest Crypto Tax Losses
- Sell losing crypto assets to offset capital gains.
- Deduct up to $3,000 per year in excess losses.
5.3 Use Crypto Tax Software
- Track transactions across exchanges with tools like CoinTracker, Koinly, or TaxBit.
5.4 Donate Crypto to Charity (IRC §170)
- Donating crypto to a 501(c)(3) nonprofit allows a charitable tax deduction.
- No capital gains tax if donated directly to a charity.
5.5 Use a Self-Directed IRA for Crypto Investing
- Buying crypto through a Self-Directed IRA (SDIRA) can provide tax-free or tax-deferred growth.
What Happens If You Don’t Report Crypto Taxes?
- IRS Matching with Form 1099-DA – Starting in 2025, exchanges will issue Form 1099-DA for crypto sales.
- IRS Penalties for Non-Compliance – Failure to report can lead to 25% penalties and interest.
- Potential IRS Audits – The IRS has increased crypto tax enforcement through Operation Hidden Treasure.
- Action Step: Always report all crypto transactions to avoid IRS penalties.
Frequently Asked Questions (FAQs)
1. Do I owe taxes if I never sold my crypto?
No, holding crypto is not taxable until sold, traded, or used.
2. Does the IRS track crypto transactions?
Yes, exchanges now report transactions to the IRS via Form 1099-DA.
3. Can I deduct crypto losses from my taxes?
Yes, you can offset crypto gains with losses and deduct up to $3,000 in excess losses.
4, Do I need to pay taxes if I receive crypto as payment?
Yes, crypto received as income or payment for services is taxable at fair market value.
5. How do I report crypto taxes?
Use Form 8949 and Schedule D (Form 1040) for sales/trades and Schedule C (Form 1040) for mining income.
Conclusion
Cryptocurrency is taxable, and failing to report it can lead to IRS penalties. Understanding how crypto is taxed, which IRS forms to use, and tax-saving strategies can help investors legally reduce their tax burden in 2025.
For expert crypto tax guidance, schedule a meeting with our CPA Anshul Goyal by clicking at https://calendly.com/anshulcpa/ now.
About Our CPA
Anshul Goyal, CPA, EA, FCA, is a licensed Certified Public Accountant in the United States and an Enrolled Agent admitted to practice before the IRS. He specializes in crypto taxation, IRS compliance, and tax planning for digital assets.
Disclaimer
This article is for informational purposes only and should not be considered legal or tax advice. Every taxpayer’s situation is different. Consult a qualified CPA or tax professional before making crypto-related tax decisions.