Cryptocurrencies and Taxes: What You Should Know

What began in 2009 with a single virtual currency—Bitcoin—has expanded not just into thousands of cryptocurrencies, but you can now also invest in cryptocurrency funds and crypto futures. But know this: All that virtual activity has real-life tax consequences.

The landscape for crypto taxes is ever-evolving as innovative cryptocurrency assets come to market and new laws and regulations are proposed. Here's how to avoid running afoul of current IRS rules while anticipating potential crypto tax changes to help you plan for the future.

The IRS treats cryptocurrencies as property, not as a currency, meaning any transactions you make using crypto will be subject to the general tax principles applied to other property transactions. Whenever you mine, sell, trade, or exchange cryptocurrency, you will likely trigger a taxable event (see "Taxable vs. nontaxable crypto events").

At the federal level, taxable crypto transactions generally involve the sale or exchange of cryptocurrency, resulting in either a capital gain or loss. Also, if you receive crypto as payment for services rendered, your earnings will be subject to income tax. Be aware that some states may also tax cryptocurrency transactions, so work with a local tax professional to determine potential tax liabilities.

If you operate a business that accepts cryptocurrencies as payment for goods or services, you may face some unexpected tax consequences. As with any business transaction, the IRS sees all exchanges with customers as a taxable event, no matter if it involves cash, credit, bartering, or crypto. When a customer or client pays you in crypto, the income you realize is based on the currency's fair market value at the time of the transaction and will be included in your gross business income.

Since the crypto is property and not a currency, another issue to be aware of is the potential for a capital gain or loss when you eventually sell the crypto you received. For example, a buyer pays you $6,000 in digital currency for a mountain bike. Because you purchased the bike for $4,000, you now have $2,000 of taxable ordinary income on that sale. But your crypto tax implications don't end there. Let's say you hold the cryptocurrency for six weeks. Its value goes up to $7,500 during that time, and you decide to sell it. Your cost basis for the crypto is $6,000, the fair market value on the date you received payment for the mountain bike, resulting in a $1,500 taxable short-term capital gain.

While we recommend all business owners work with a tax professional, if your business accepts cryptocurrency, it's doubly important to have a tax advisor who understands how virtual currencies could impact your taxes.

Currently, the majority of the tax-reporting burden for crypto transactions lands on the individual taxpayer, and given the complexity of cryptocurrency transactions, recordkeeping is paramount. The IRS expects you to substantiate reported figures and calculations on your tax return, so you'll want to maintain detailed records that include:

• Dates of acquisition and sale
• Purchase and sale prices in U.S. dollars
• Quantities of each transaction
• Purpose of the transaction (investment, payment for goods or services, wages, etc.)

Some people believe crypto transactions are untraceable, but blockchain technology creates a permanent public ledger and cryptocurrency exchanges record all transactions. This transparency makes tracking the flow of funds possible, allowing taxing authorities to analyze such records and link transactions to individuals or entities.

And starting in 2025, crypto exchanges must report certain digital asset sales and transactions on Form 1099-DA. Gains and losses for cryptocurrency funds or regulated futures, however, will continue to be reported on Form 1099-B. But remember, even if you don't receive any tax forms, you must report all taxable crypto transactions to the IRS on your personal tax return.

Tax regulations continue to evolve, so professional guidance can help ensure you don't run afoul of both federal and state tax rules—especially if you operate a crypto mining business or engage in high-volume trading. Underreporting income, recording transactions improperly, and inaccurate documentation could lead to a tax audit, significant penalties and interest, or even prison sentences. We recommend you work with a CPA or tax attorney to review your situation and correct any errors as soon as possible.

Cryptocurrency taxation in the U.S. is complex, but understanding the current rules can help you avoid penalties and maximize the tax efficiency of your digital investments. Whether you're a miner, investor, business owner, or casual trader, proper recordkeeping and strategic tax planning can help reduce your tax burden while ensuring compliance with IRS regulations. For those with large or complex crypto holdings, consult a crypto-savvy tax professional to help ensure full compliance while maximizing tax-saving opportunities.

Also, crypto tax rules are ever-evolving, so if you're not sure how to report your crypto transactions properly, work with a tax advisor—and file an amended return as soon as possible for any past missteps.