Cryptocurrency awareness and ownership have skyrocketed in recent years like the price of its shining star Bitcoin, which this summer trades around $65,000 a coin, an increase from around $500 back in 2016.

Of course, $500 a coin seemed expensive since Bitcoin was approximately $15 a coin in 2012. If you risked $1,500 two decades ago for 100 coins … the value today of your cryptocurrency would be a staggering $6.5 million!

With the crypto market approaching a $2.5 trillion market cap, the Internal Revenue Service (IRS) has taken keen notice and will require crypto brokers to file 1099 forms in 2025 like their traditional investment-firm cousins, according to CoinDesk.

Cryptocurrency is NOT Invisible to the IRS!

It’s been the taxpayers' responsibility to report taxable crypto transactions from the start, but some crypto owners have failed to do so, either through ignorance or negligence.

“People still think that crypto is kind of invisible to regulators,” CPA Shehan Chandrasekera told CNBC. “Truthfully, there are so many ways the IRS knows you’ve had something to do with crypto.”

And ignorance is no longer an option with the IRS Form 1040 asking about “Digital Assets” on the first page of the form, right below your name, address, social security number, and filing status.

“The No. 1 mistake crypto traders tend to make is assuming that the Internal Revenue Service isn’t able to see their crypto transactions and therefore they don’t need to report them when they file their taxes,” explained Chandrasekera.

More Americans will be faced with properly reporting their Bitcoin and other crypto transactions as ownership among U.S. adults of cryptocurrency is now 40 percent, up from 30 percent in 2023.

Those numbers are sure to rise as awareness of crypto, according to Security.org, has gone from less than 50 percent of the population in 2021 to 80 percent today.

Let’s break down how cryptocurrency taxes work, what gets taxed, and how you can stay compliant with IRS regulations.

How Cryptocurrency Taxes Work

Despite the name being cryptocurrency, the IRS classifies Bitcoin and other crypto as property.

“For U.S. tax purposes, digital assets are considered property, not currency,” says the IRS. “A digital asset is stored electronically and can be bought, sold, owned, transferred or traded. The tax definition of a digital asset is any digital representation of value recorded on a cryptographically secured, distributed ledger (blockchain) or similar technology.”

The IRS says cryptocurrency is a digital asset that has equivalent value in real currency or acts as a substitute for real currency – able to pay for goods and services; be digitally traded; and exchanged for or converted into currencies or other digital assets.

Basically, every time you buy, sell, or exchange cryptocurrency, it's considered a taxable event.

Understanding what constitutes a taxable event is crucial for proper reporting. Here are some common cryptocurrency transactions that trigger tax obligations:

• Selling cryptocurrency for fiat currency (e.g., USD).
• Trading one cryptocurrency for another.
• Using cryptocurrency to purchase goods or services.
• Receiving cryptocurrency as payment for goods or services.
• Mining or staking rewards.
• Receiving airdrops (receiving free coins or tokens) or hard forks (changes in blockchain programming that create a new blockchain and cryptocurrency).

The IRS requires taxpayers to report all cryptocurrency transactions, regardless of the amount. This information is typically reported on Form 8949 and Schedule D of your tax return. Additionally, you may need to file Form 1040 to report any income received in the form of cryptocurrency.

What Gets Taxed When You Buy, Sell or Exchange Crypto

When you sell or exchange cryptocurrency, you may incur capital gains or losses. The tax rate depends on how long you held the asset:

• Short-term capital gains (assets held for less than a year) are taxed at your ordinary income tax rate
  
  
• Long-term capital gains (assets held for more than a year) are taxed at preferential rates of 0 percent, 15 percent, or 20 percent, depending on your income bracket

If you engage in cryptocurrency mining or staking, the fair market value of the coins you receive is considered taxable income. This income is typically subject to self-employment tax if mining is your business.

If you receive cryptocurrency as payment for goods or services, it's treated as ordinary income. The amount of income to report is the fair market value of the cryptocurrency at

Cryptocurrency received through airdrops or hard forks is generally considered taxable income. The fair market value of the new coins at the time of receipt must be reported as ordinary income.

How to Calculate Your Cryptocurrency Taxes

To calculate the capital gain or loss of a digital asset that you sold or disposed of in a transaction, you'll need this information:

• Type of digital asset.
• Date and time of transaction.
• Number of units.
• Fair market value at the time of the transaction (as measured in U.S. dollars).
• Basis of digital assets sold or disposed of.

Find how to calculate gain or loss, identify the units sold or disposed of, and determine fair market value for your situation: FAQs on virtual currency transactions.

If you own and use a digital asset for personal or investment purposes, then the income would be taxed as a capital gain or loss when you sell or dispose.

If you receive a digital asset in exchange for goods or services in a business context, then the income would be taxed as ordinary income or a loss.

Common Cryptocurrency Tax Mistakes to Avoid

Dealing with the IRS and all the arcane rules and frustrating forms is never easy and reporting your cryptocurrency is no exception.

A common mistake for crypto investors, according to Forbes, is a “failure to understand that taxation on crypto transactions is not limited purely to the buying and selling of cryptocurrencies. Spending BTC at retailers that accept it and even swapping one cryptocurrency for another can result in tax liabilities, each activity with different implications on taxation.”

Let’s look at other common cryptocurrency tax mistakes:

• Failing to report all transactions.
• Incorrectly calculating cost basis.
• Misclassifying trading activity as investment activity.
• Neglecting to report mining or staking income.
• Ignoring the tax implications of airdrops and hard forks.

Tips for Minimizing Your Cryptocurrency Tax Burden

When you start to treat your cryptocurrency like other ordinary investments, then you can minimize your tax burden with some tried and true strategies such as:

• Hold assets for more than a year to qualify for long-term capital gains rates.
• Consider tax-loss harvesting to offset gains.
• Keep detailed records of all transactions.
• Stay informed about changing regulations.
• Consult with a cryptocurrency tax professional.

Navigating the world of cryptocurrency taxes can be challenging, but staying compliant is essential to avoid potential penalties and legal issues. By understanding how cryptocurrency taxes work and what gets taxed, you can make more informed decisions about your digital asset investments.

Remember, tax laws and regulations surrounding cryptocurrency are continually evolving. What's true today may change tomorrow, making it crucial to stay informed and seek professional guidance when needed.

At Powell Tax Law, we specialize in helping investors navigate the complex world of asset taxation, including cryptocurrency. Our team of experienced professionals can assist you with tax planning, compliance, and reporting to ensure you stay on the right side of the IRS.

Contact us today for a consultation and take the stress out of your cryptocurrency tax obligations.