How to Report Digital Assets (Cryptocurrency & NFTs) on Form 1040

Introduction

The IRS considers cryptocurrency, NFTs, and digital tokens as taxable assets. Taxpayers must report gains, losses, and transactions involving digital assets on Form 1040. Failing to report these transactions can result in IRS penalties.

This guide explains how digital assets are taxed, how to report them on Form 1040, and what IRS compliance rules apply.

 Tax Code References for Digital Assets (IRC § 61 & § 1221)

• IRC § 61 states that all income, including digital asset gains, staking rewards, and mining income, must be reported as taxable income.
• IRC § 1221 classifies digital assets as property, meaning capital gains rules apply to sales and trades.
• IRS Notice 2014-21 and Revenue Ruling 2019-24 clarify tax treatment for cryptocurrency and hard forks.

  How the IRS Defines Digital Assets (Cryptocurrency, NFTs, and Tokens)

The IRS defines digital assets as:

• Cryptocurrency (Bitcoin, Ethereum, Solana, etc.)
• Non-Fungible Tokens (NFTs)
• Stablecoins (USDC, DAI, etc.)
• Tokenized assets and digital collectibles

Taxpayers must report transactions involving these assets, including buying, selling, staking, mining, and receiving payments in crypto.

 Tax Treatment of Cryptocurrency and NFTs

Capital Gains Tax on Cryptocurrency & NFTs

Holding Period:

• Short-term gains (held <1 year) taxed as ordinary income.
• Long-term gains (held >1 year) taxed at capital gains rates (0%, 15%, or 20%).

Taxable Events:

• Selling crypto for fiat (e.g., USD).
• Trading one cryptocurrency for another (e.g., BTC to ETH).
• Selling NFTs for profit.
• Using crypto to buy goods or services.

Ordinary Income Tax on Crypto Transactions

• Crypto received as payment for services is taxable as ordinary income.
• Staking rewards and mining income are taxed as self-employment income.

IRS Reporting Requirements for Digital Assets on Form 1040

The IRS requires taxpayers to answer a digital asset question on Form 1040:

“At any time during 2024, did you receive, sell, exchange, or otherwise dispose of any digital asset?”

If the answer is “Yes”, taxpayers must report transactions on:

• Form 8949 – Reports crypto & NFT gains and losses.
• Schedule D – Summarizes total capital gains and losses.
• Schedule C – Reports crypto income for self-employed individuals.
• Form 1040 – Reports digital asset income and total taxable amount.

 How to Report Cryptocurrency and NFTs on Tax Returns

Example Scenarios for Digital Asset Taxation

Example 1: Selling Crypto for a Profit

• David buys 1 Bitcoin for $30,000 in January 2023.
• He sells it for $50,000 in February 2024.
• His taxable gain is $20,000.
• He reports it on Form 8949 and Schedule D.

Example 2: Trading One Cryptocurrency for Another

• Sarah trades Ethereum worth $5,000 for Solana worth $5,500.
• She realizes a $500 taxable gain, reported on Form 8949.

Example 3: Earning Crypto from Mining

• Tom mines 0.5 BTC worth $15,000.
• He reports it as self-employment income on Schedule C.
• He also pays self-employment tax on mining earnings.

Step-by-Step Guide to Reporting Digital Assets on Form 1040

Step 1: Answer the Digital Asset Question on Form 1040

• If you bought, sold, or traded crypto/NFTs, answer “Yes”.

Step 2: Report Capital Gains on Form 8949

List each taxable crypto transaction:

• Date acquired
• Date sold
• Cost basis (purchase price)
• Sale price
• Gain or loss

Step 3: Summarize Capital Gains on Schedule D

• Short-term and long-term capital gains must be categorized separately.

step 4: Report Crypto Income on Schedule C

• If you earned crypto from staking, mining, or freelance work, report it as business income.

Step 5: File with a CPA for Accuracy

• Work with a tax professional to avoid IRS audits and penalties.

  IRS Compliance Requirements

To comply with IRS rules, taxpayers must:

• Report all taxable digital asset transactions on Form 8949 and Schedule D.
• Maintain detailed records of purchases, sales, and trades.
• Use crypto tax software to track transactions and generate reports.
• File tax returns on time to avoid IRS penalties and interest.

Failure to report crypto transactions may result in IRS penalties, back taxes, and potential audits.

Conclusion

Cryptocurrency and NFTs are taxable assets, and transactions must be reported on Form 1040, Form 8949, and Schedule D. Whether selling crypto, trading tokens, or earning staking rewards, taxpayers must accurately report all taxable events to the IRS.

For expert guidance on crypto tax reporting and compliance, consult Anshul Goyal, CPA EA FCA, a Certified Public Accountant and IRS compliance expert, to ensure accurate tax filings.

FAQs

1. Do I have to report crypto if I did not sell it?
No, buying and holding cryptocurrency is not taxable, but the IRS still requires taxpayers to answer the Form 1040 digital asset question.

2. How is NFT income taxed?
Selling NFTs for a profit is subject to capital gains tax, while NFT creators must report sales as ordinary income.

3. Can I deduct crypto losses?
Yes, crypto losses can offset gains, and up to $3,000 of net losses can reduce taxable income.

4. How does the IRS track crypto transactions?
The IRS receives 1099 forms from crypto exchanges and monitors blockchain transactions for unreported taxable events.

5. Can I avoid paying taxes by gifting crypto?
Yes, gifting crypto under $18,000 per year is not taxable for the recipient, but the donor may need to file a gift tax return.

About Our CPA

Anshul Goyal, CPA EA FCA, is a Certified Public Accountant (CPA) and IRS compliance expert specializing in digital asset taxation.