Introduction
Cryptocurrency and NFTs are classified as property for tax purposes, meaning they are subject to capital gains tax when sold, exchanged, or used for purchases. The IRS has strict reporting requirements, and failure to report transactions can lead to penalties.
This guide explains how cryptocurrency and NFT transactions are taxed, what forms to use, and how to stay compliant with IRS rules.
 Tax Code References for Cryptocurrency and NFT Taxation
- IRC § 61 – Defines cryptocurrency as taxable income when received.
- IRC § 1221 – Classifies crypto and NFTs as capital assets subject to capital gains tax.
- IRC § 1001 – Governs tax treatment when disposing of digital assets.
- IRC § 1012 – Establishes cost basis rules for cryptocurrency.
 Relevant IRS Forms for Reporting Crypto and NFT Transactions
- Form 8949 – Reports capital gains and losses from crypto and NFT transactions.
- Schedule D (Form 1040) – Summarizes net gains or losses.
- Form 1099-B – Provided by some exchanges to report crypto sales.
- Form 1040, Line 8 – Reports crypto income (if earned from mining, staking, or payments).
- Form 1040, Virtual Currency Question – Requires taxpayers to disclose crypto activity.
 How Cryptocurrency and NFTs Are Taxed
1. Buying and Holding Cryptocurrency or NFTs
- Simply buying and holding crypto or NFTs is not taxable.
2. Selling Crypto or NFTs for Fiat (USD or Other Currencies)
- Any sale results in a capital gain or loss.
- Gains from crypto sales are taxed at short-term or long-term capital gains rates.
3. Exchanging One Cryptocurrency for Another
- Swapping Bitcoin for Ethereum is taxable, even if no fiat currency is involved.
- The difference between the purchase price and sale price determines the gain or loss.
4. Using Crypto for Purchases
- Using crypto to buy goods or services is a taxable event.
- The difference between the cost basis and market value at the time of purchase is the taxable gain.
5. NFT Transactions (Buying, Selling, and Minting)
- Buying an NFT is not taxable, but selling it is.
- Minting an NFT and selling it results in self-employment income (subject to ordinary income tax and self-employment tax).
- NFT royalties received are taxable as ordinary income.
6. Mining and Staking Rewards
- Mining income is taxed as ordinary income when received.
- Staking rewards are also taxed as ordinary income when credited to your wallet.
7. Airdrops and Hard Forks
- Airdropped tokens are taxable as ordinary income at fair market value when received.
- Hard forks are taxable if new coins are deposited into the taxpayer’s wallet.
 Step-by-Step Guide to Reporting Crypto and NFT Transactions on IRS Form 1040
Step 1: Track All Transactions
- Use crypto tax software or export transaction history from exchanges.
Step 2: Report Capital Gains and Losses on Form 8949
- List each sale or exchange with purchase and sale dates, cost basis, and sale price.
Step 3: Summarize Gains and Losses on Schedule D
- Separate short-term and long-term transactions.
- If losses exceed gains, deduct up to $3,000 per year against ordinary income.
Step 4: Report Crypto Income on Form 1040
- Line 8 of Form 1040 – Report income from mining, staking, or airdrops.
Step 5: File IRS Form 1040 with the Virtual Currency Question Answered
- The IRS requires taxpayers to check “Yes” if they engaged in any digital asset transactions.
Step 6: File Your Tax Return
- Attach Form 8949 and Schedule D for crypto and NFT transactions.
 Example Scenarios for Crypto and NFT Taxation
Example 1: Capital Gain on Selling Crypto
- John bought 1 Bitcoin for $20,000 and sold it for $40,000 after 2 years.
- His $20,000 gain is taxed at 15% (long-term capital gains rate).
Example 2: Exchanging Crypto for Another Coin
- Lisa bought 5 Ethereum for $2,500 and later traded them for Solana when Ethereum was worth $4,000 each.
- Her taxable gain is $1,500 per ETH, reported on Form 8949.
Example 3: Buying and Selling an NFT
- Mark bought an NFT for 1 ETH ($2,000) and later sold it for 2 ETH ($5,000).
- His capital gain is $3,000, taxable at short-term or long-term rates.
Example 4: Mining Crypto as Income
- Sarah mined Bitcoin worth $5,000 in 2024.
- She reports $5,000 as ordinary income on Form 1040, Line 8.
 Common Mistakes to Avoid
- Failing to report crypto-to-crypto trades – Exchanges are taxable transactions.
- Not tracking cost basis – Missing records can result in higher taxable gains.
- Ignoring staking and mining income – These must be reported as ordinary income.
 IRS Compliance Requirements
- Report all crypto and NFT transactions on Form 8949 and Schedule D.
- Answer “Yes” to the Virtual Currency Question on IRS Form 1040.
- Keep detailed records of transactions, including cost basis and timestamps.
 Conclusion
Cryptocurrency and NFT transactions are taxable events under IRS rules, and failure to report them can result in penalties. Understanding capital gains tax, income tax for mining and staking, and how to report transactions on Form 1040 ensures compliance.
For expert tax guidance on crypto and NFT taxation, consult Anshul Goyal, CPA EA FCA, a Certified Public Accountant and IRS compliance expert.
 FAQs
1. Are cryptocurrency transactions taxable?
Yes. Crypto sales, exchanges, and payments are taxable as capital gains or ordinary income.
2. Do I have to report crypto if I didn’t sell?
No. Simply holding crypto is not taxable, but staking and mining rewards must be reported as income.
3. How are NFTs taxed?
Selling NFTs results in capital gains tax, while NFT royalties are taxed as ordinary income.
4. What happens if I don’t report crypto transactions?
The IRS can impose penalties and audits if crypto gains or income are unreported.
5. Where do I report crypto on my tax return?
Enter crypto sales on Form 8949 and Schedule D, and income from mining or staking on Form 1040, Line 8.
 About Our CPA
Anshul Goyal, CPA EA FCA, is a Certified Public Accountant and IRS compliance expert specializing in cryptocurrency taxation, NFT reporting, and blockchain-related tax issues.
For personalized tax assistance, schedule a consultation with Anshul Goyal, CPA EA FCA today.