How Crypto and Digital Assets Are Taxed

What Counts as a Digital Asset?

Digital assets generally include digital representations of value recorded on a cryptographically secured ledger or similar technology.

Common examples include:

• Cryptocurrency
• Stablecoins
• Non-fungible tokens, also known as NFTs
• Certain other blockchain-based assets

Bitcoin and Ethereum are two of the most well-known cryptocurrencies, but they are only part of the broader digital asset category.

Is Buying Crypto Taxable?

Buying crypto with U.S. dollars and simply holding it is generally not taxable.

For example, if you buy Bitcoin and keep it in your account or wallet, you usually do not owe tax just because the value goes up.

The tax issue usually begins when there is a taxable event, such as selling, exchanging, spending, or receiving digital assets.

When Is Crypto Taxable?

Crypto may be taxable when you dispose of it or receive it as income.

Common taxable crypto transactions may include:

• Selling cryptocurrency for U.S. dollars
• Trading one cryptocurrency for another
  
• Using crypto to buy goods or services
  
• Receiving crypto as payment
  
• Receiving mining or staking rewards
  
• Receiving certain airdrops or rewards

For example, if you bought Bitcoin for $10,000 and later sold it for $15,000, the $5,000 increase may be a taxable capital gain.

If you traded Ethereum for Bitcoin, that may also be taxable, even if you never received cash.

Crypto-to-Crypto Trades Can Be Taxable

One of the biggest mistakes people make is assuming crypto-to-crypto trades are tax-free.

They are generally not.

If you exchange one digital asset for another, the IRS may treat that as a disposal of the asset you gave up. That means you may need to calculate whether you had a gain or loss based on your cost basis and the value of the asset at the time of the trade.

For example, if you bought Ethereum for $10,000 and later exchanged it when it was worth $14,000, the $4,000 increase may be a taxable gain.

Using Crypto to Buy Something Can Trigger Tax

Using crypto to purchase goods or services can also create a taxable event.

For example, if you bought crypto for $5,000 and later used it when it was worth $8,000 to buy something, you may have a $3,000 gain.

Even though you used crypto instead of cash, you still disposed of the digital asset. That disposal may need to be reported on your tax return.

Crypto Received as Income

Crypto is not only taxed when it is sold.

If you receive crypto as payment, mining rewards, staking rewards, or certain other distributions, it may be taxable income when received.

For example, if a freelancer is paid $4,000 worth of cryptocurrency for work, that $4,000 may be taxable income.

If that crypto later increases in value and is sold for $5,000, there may be another tax event on the additional $1,000 gain.

This is why crypto can create more than one tax issue: income when received, and a capital gain or loss when later sold or exchanged.

How Crypto Gains and Losses Are Calculated

To calculate a crypto gain or loss, you generally need to know two things:

How much you received when you sold or exchanged the asset

Your cost basis in the asset

A simplified formula is:

Amount received minus adjusted cost basis equals capital gain or loss.

For example, if you bought Bitcoin for $40,000 and later sold it for $55,000, you may have a $15,000 capital gain.

If you bought Bitcoin for $40,000 and sold it for $32,000, you may have an $8,000 capital loss.

The calculation can become more complicated if you used multiple exchanges, paid transaction fees, transferred crypto between wallets, bought at different prices, or received crypto as income.

Can Crypto Losses Help Reduce Taxes?

If you sell crypto for less than your cost basis, you may have a capital loss.

Capital losses can generally offset capital gains. If your losses are more than your gains, you may be able to deduct a limited amount against other income, subject to IRS rules.

However, simply holding crypto that has gone down in value does not usually create a deductible loss. The loss generally must be realized through a sale or other taxable disposition.

What Forms Are Used to Report Crypto?

The forms needed depend on the type of crypto activity.

Taxable sales, exchanges, and other dispositions of digital assets held as capital assets are generally reported on Form 8949 and Schedule D.

Crypto received as income may need to be reported on other forms, depending on the situation. For example, crypto received for business services may be reported differently than crypto sold as an investment.

Taxpayers may also receive Form 1099-DA from a digital asset broker. This form reports certain digital asset transactions, but it does not replace the taxpayer’s responsibility to report taxable crypto activity correctly.

What If You Do Not Receive a 1099?

Not receiving a tax form does not mean you can ignore crypto activity.

Taxpayers are still responsible for reporting taxable digital asset transactions, even if they do not receive a Form 1099-DA or another tax document.

This is especially important for people who use multiple exchanges, transfer assets between wallets, or sell crypto through a platform that does not have complete cost basis information.

Your own records may be needed to calculate the correct gain or loss.

Are Wallet Transfers Taxable?

Moving crypto between wallets or accounts you own is generally not taxable by itself.

For example, transferring Bitcoin from an exchange account to your personal wallet usually does not create a taxable event.

However, you should keep records showing that both accounts belong to you. You should also track any transaction fees, because fees paid with crypto may have separate tax consequences.

Common Crypto Tax Mistakes

Crypto tax reporting can get messy quickly, especially when transactions happen across multiple platforms.

Common mistakes include:

• Assuming crypto-to-crypto trades are tax-free
  
• Only reporting transactions listed on a tax form
  
• Losing track of cost basis
  
• Forgetting that mining, staking, or crypto payments may be income
  
• Treating every wallet transfer as a sale
  
• Waiting until tax season to organize records

These mistakes can lead to inaccurate returns, tax notices, penalties, interest, or IRS compliance problems.

What Crypto Records Should You Keep?

Good recordkeeping is one of the most important parts of crypto tax reporting.

You should keep records showing:

• The type of digital asset
  
• The amount purchased, sold, exchanged, or received
  
• Dates and times of transactions
  
• Purchase price
  
• Cost basis
  
• Sale or exchange proceeds
  
• Fair market value when received
  
• Transaction fees
  
• Exchange and wallet information
  
• Transfers between accounts
  
• Forms 1099-DA or other tax documents

Without accurate records, it can be difficult to calculate gains, losses, and income correctly.

What Happens If You Do Not Report Crypto?

Failing to report taxable crypto activity can lead to additional tax, penalties, interest, and IRS notices.

If you discover that you failed to report crypto transactions in a prior year, you may need to correct the issue. Depending on the situation, that may involve filing an amended return or taking another corrective step.

Because crypto reporting can be complicated, taxpayers with significant unreported activity may want professional guidance before deciding how to proceed.

Final Thoughts

Crypto and digital assets can create tax obligations in more ways than many people realize.

Buying and holding crypto generally is not taxable, but selling, exchanging, spending, or receiving digital assets may trigger reporting requirements. Even if you do not receive a tax form, you may still be responsible for reporting taxable transactions.

If you have crypto gains, losses, unreported transactions, IRS notices, or unpaid tax balances, Arch Tax can help you understand your options.

Contact Arch Tax today for a free, confidential consultation.