Cryptocurrency has moved from the financial fringe to the mainstream in 2025. No longer hidden in the shadows, cryptocurrency is being embraced from Wall Street to Main Street.

“Instead of pushing cryptocurrencies to the sidelines, policymakers are now looking for ways to safely integrate them into the broader financial system,” says one investment firm.

As adoption accelerates — Morgan Stanley in October 2025 officially recommended exposure to crypto, especially Bitcoin which it called a “scarce asset, akin to digital gold” — the tax landscape is evolving just as quickly.

For 2025, the IRS and Treasury Department have tightened the rules governing digital asset transactions, ushering in a new era of transparency and compliance. Whether you’re a casual crypto trader, a DeFi enthusiast, or a business that accepts cryptocurrency payments, understanding how crypto taxes work — and what’s changing this year — is critical to staying compliant and protecting your returns.

A Turning Point in Cryptocurrency Tax Law

The 2025 tax year represents a major inflection point. While the IRS has treated digital assets as property for years, new regulations are making reporting requirements far more rigorous.

Several key developments are reshaping the compliance landscape:

• New IRS Form 1099-DA: Beginning in 2025, digital asset brokers such as Coinbase, Kraken and others must issue a new information form (Form 1099-DA) to customers and the IRS, reporting crypto sales and exchanges.
• Wallet-by-wallet accounting: Taxpayers can no longer use a single “universal” method to pool cost basis across multiple wallets. Each wallet or exchange must now track its own basis, a change that could significantly affect gain/loss calculations.
• Repeal of the DeFi reporting rule: Congress voted in 2025 to nullify the controversial rule that would have required decentralized (non-custodial) platforms to report user activity to the IRS. This means responsibility for reporting now rests squarely with the taxpayer.
• Heightened enforcement: With expanded analytics and third-party data from exchanges, the IRS is increasingly targeting unreported crypto income, staking rewards and capital gains.

How Cryptocurrency Taxes Work

Despite its name, cryptocurrency isn’t treated like currency for tax purposes — it’s treated as property. That means the tax principles governing real estate or stock investments also apply to digital assets.

According to the IRS:

“For U.S. tax purposes, digital assets are considered property, not currency. A digital asset is a digital representation of value recorded on a cryptographically secured distributed ledger.”

Every time you buy, sell or exchange cryptocurrency, you may trigger a taxable event. Here’s a breakdown of the most common scenarios:

Understanding Capital Gains

The tax rate on cryptocurrency depends on how long you hold it before selling or exchanging it:

• Short-term capital gains (held for less than one year) are taxed at your ordinary income tax rate — up to 37 percent.
• Long-term capital gains (held for more than a year) enjoy lower rates: 0, 15 or 20 percent, depending on income level.

Like stocks, crypto investors can also use tax-loss harvesting — selling assets at a loss to offset gains elsewhere — to reduce their taxable income.

The New 1099-DA: What to Expect

Until now, crypto investors were largely responsible for self-reporting their trades. That’s changing fast.

Beginning in 2025, exchanges and other digital asset brokers must issue Form 1099-DA for certain transactions, much like traditional brokerages send Form 1099-B for stock trades. The form will list details such as proceeds, transaction dates and wallet identifiers, giving the IRS a clearer view of each taxpayer’s crypto activity.

While 2025 is the first year brokers must begin collecting this information, penalty relief is available for platforms that make a “good faith effort” to comply. By 2026, however, the IRS expects full reporting, including cost basis information.

What this means for you:

• If you trade through a U.S.-based exchange, expect to receive Form 1099-DA in early 2026.
• You must reconcile it against your own records — errors or missing data could cause discrepancies on your tax return.
• Even if you don’t receive a form, you are still legally obligated to report your digital asset activity.

Wallet-by-Wallet Accounting: The End of Universal Basis

In prior years, some taxpayers used a “universal” cost basis method — pooling crypto holdings across multiple wallets or exchanges.

Under new IRS rules effective January 1, 2025, that practice is being phased out. You must now calculate gain or loss separately for each wallet or account, tracking acquisition date, cost basis and sale proceeds individually.

The IRS has issued a temporary safe harbor for those transitioning from the old method, allowing reasonable allocation of cost basis across wallets. However, after 2025, strict wallet-specific tracking will be required.

This change emphasizes the need for detailed, organized record-keeping. Crypto tax software and professional assistance can help prevent “orphaned basis” — situations where assets lack clear acquisition data, resulting in inflated taxable gains.

What About DeFi and Decentralized Exchanges?

A controversial Treasury regulation once required decentralized finance (DeFi) platforms to act as brokers and report customer transactions to the IRS. That rule was officially repealed in 2025, easing the burden on decentralized projects but leaving investors with no reporting safety net.

In short: just because a platform doesn’t send you a tax form doesn’t mean the IRS doesn’t expect you to report your income.

Every swap, token trade or liquidity-pool withdrawal may be a taxable event. The onus is now entirely on the user to document these transactions — another reason why professional tax help is increasingly vital.

Common Mistakes to Avoid in 2025

1. Assuming the IRS can’t see your crypto activity.
   Blockchain data analytics firms now help the IRS trace wallet addresses, exchange accounts and transfers. Visibility has never been higher.
2. Neglecting small transactions.
   Even minor trades or purchases must be reported when you check “Yes” on Form 1040’s digital asset question.
3. Ignoring staking, mining or airdrops.
   These generate taxable income at the fair market value when received — even if you haven’t sold the tokens yet.
4. Failing to track wallet-to-wallet transfers.
   Moving coins between your own wallets isn’t taxable, but you’ll need records to prove it if audited.
5. Relying solely on exchange summaries.
   Your 1099-DA may omit certain transfers or incorrectly calculate cost basis. Always maintain independent records.

How to Stay Compliant and Reduce Your Tax Burden

As crypto matures, the smartest investors treat it like any other asset class — with a strategy that integrates tax planning, compliance and record-keeping.

Here are best practices for 2025 and beyond:

• Keep detailed records for every transaction, including wallet addresses, cost basis, dates and market value.
• Use crypto tax software that supports wallet-by-wallet tracking.
• Hold assets for over a year whenever possible to benefit from long-term capital gains rates.
• Harvest losses strategically to offset taxable gains.
• Consult a crypto tax attorney or CPA before major trades or conversions to avoid surprises.

Understanding how cryptocurrency taxes work — and adapting to new laws — can save you significant money and prevent costly mistakes.

At Powell Tax Law, we help clients navigate the evolving landscape of cryptocurrency tax laws with precision and confidence. Contact Powell Tax Law today to schedule a free consultation.