How to Properly Report Digital Assets on Your Tax Return

A current IRS hot button is federal income tax reporting of digital-asset transactions. The government is concerned that some taxpayers fail to report the results of digital-asset transactions on their federal income tax returns. Here are answers to some common questions about digital asset tax reporting to help you avoid tangles with the IRS.

What’s a Digital Asset?

The IRS defines digital assets as any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology. Examples include:

• Cryptocurrencies (sometimes called virtual currencies),
• Stablecoins, and
• Nonfungible tokens (NFTs).

If a particular asset has the characteristics of a digital asset, the IRS will classify it as a digital asset for federal income tax purposes.

How Should You Answer the Digital Assets Question on Your 2024 Return?

The top of your federal income tax return asks a question about digital-asset transactions. You should check “yes” to this box if, at any time during 2024, you:

• Received a digital asset or a financial interest in a digital asset as a reward, award or payment for property or services, or
• Sold, exchanged or otherwise disposed of a digital asset or a financial interest in a digital asset.

According to the IRS, you have a financial interest in a digital asset if you:

• Are the owner of record of a digital asset,
• Have an ownership stake in an account that holds one or more digital assets, including the rights and obligations to acquire a financial interest, or
• Own a wallet that holds digital assets.

Examples of situations that require an affirmative answer include:

• You received digital assets as payment for property or services rendered.
• You received digital assets as a reward or award.
• You received new digital assets from mining, staking and similar activities.
• You received digital assets from a hard fork (a significant update or change to a blockchain protocol that’s not backward-compatible with previous versions).
• You disposed of digital assets in exchange for property or services.
• You disposed of a digital asset in exchange or trade for another digital asset.
• You sold a digital asset or otherwise disposed of any other financial interest in a digital asset.

On the other hand, you aren’t required to report the following actions, in and of themselves:

• Holding a digital asset in a wallet or account.
• Transferring a digital asset from one wallet or account that you own or control to another wallet or account that you own or control.
• Purchasing a digital asset, including through an electronic platform such as PayPal or Venmo.

So, if you did nothing more than one of the three things on this list in 2024, your tax preparer will check the “No” box on your return.

Important: You must check either “yes” or “no.” You can’t leave the question about digital asset transactions unanswered.

How Should You Report the Tax Results of Digital Asset Transactions?

To arrive at the federal income tax results of a digital transaction, start by calculating the asset’s fair market value (FMV), measured in U.S. dollars, on the date you received or paid it. The values of popular cryptocurrencies are listed on exchanges. For instance, on December 31, 2024, Bitcoin’s closing price was approximately $93,429. If you bought one Bitcoin with U.S. dollars at this price, your tax basis for the Bitcoin would be $93,429.

When crypto is exchanged for other property, including U.S. dollars or a different cryptocurrency, a taxable gain or loss must be recognized.

Understanding the IRS’s Position on Digital Assets

The IRS classifies digital assets as property (rather than securities) for federal income tax purposes. That means taxpayers are supposed to report taxable gains or losses every time they exchange a digital asset for goods, services, U.S. dollars or another digital asset. Depending on how long a digital asset was held before being used in a transaction, the taxable gain or loss from selling or exchanging it will generally be either: 1) a short-term capital gain or loss, or 2) a long-term gain or loss.

A taxable gain is recognized if the FMV of the property received exceeds the tax basis of the crypto that’s exchanged. If crypto is held for investment purposes for more than one year, the gain will generally qualify as a lower-taxed long-term capital gain. A taxable loss happens if the FMV of the property received is less than the tax basis of the crypto.

If you accept cryptocurrency for goods or services, you must determine the FMV of the crypto on the transaction date to convert the deal into U.S. dollars. Then, you can calculate your taxable income or gain.

For instance, Lamar sells a vintage car that he bought and restored. He accepts one Bitcoin plus $10,000 cash as payment. Let’s assume the FMV of one Bitcoin on the sale date is $80,000, and his tax basis in the car is $55,000. Lamar should report a $35,000 taxable gain from the sale on his tax return ($80,000 plus $10,000 minus $55,000). Whether the gain is short- or long-term depends on how long he’s owned the vehicle.

How Should Businesses Report Crypto Transactions?

If your business uses crypto to pay employee wages, the FMV of the crypto counts as wages subject to federal income tax withholding and federal payroll taxes. Like any other wages paid to employees, the business must report the wages on Form W-2.

If your business uses crypto to pay an independent contractor for performing services, the crypto’s FMV is potentially subject to self-employment tax for the contractor. If payments to that contractor during the year amount to $600 or more, your business must report the total amount of payments on Form 1099-NEC, “Nonemployee Compensation.”

There may also be a taxable gain or loss due to appreciation or decline in the value of crypto while it’s held before paying it out as wages or for services from an independent contractor. Unless you’re in the trade or business of buying and selling crypto, the gain or loss will be a capital gain or capital loss. Whether it’s short- or long-term depends on how long you’ve held the crypto asset.

For example, in August 2024, Reagan used two Bitcoin to buy tax-deductible supplies for her sole proprietorship business. The FMV of the Bitcoin when they were exchanged for cash to pay for the supplies was $60,000. So, she can claim a business expense deduction on Schedule C of $120,000.

Reagan also must report a taxable gain or loss from holding the Bitcoin before spending them. Assuming she originally purchased the Bitcoin in February 2024 for $45,000 each, she has a $30,000 taxable gain from the Bitcoin’s appreciation while she held them ($120,000 minus $90,000). The $30,000 gain is a short-term capital gain, because she held the Bitcoin for less than one year.

Are Crypto Losses Exempt from the Wash Sale Rule?

Because cryptocurrencies are classified as property, the wash sale rule doesn’t apply if you sell a cryptocurrency holding for a loss and then acquire the same cryptocurrency shortly before or after the loss sale. The transaction simply generates a short-term or long-term capital loss depending on how long the crypto was held. This favorable federal income tax treatment is consistent with the longstanding treatment of foreign currency losses.

For instance, Brock bought some crypto high and sold it for a $40,000 loss in 2024. During the year, he also ran up large stock market gains in his taxable brokerage firm account. Brock can offset some of his stock gains for 2024 with the $40,000 loss from selling the crypto even if he buys back the same type of crypto shortly after the loss sale. While sales of securities are subject to the wash sale rule, sales of property (including digital assets) are exempt from this rule.

Important: Losses from crypto-related securities, such as Coinbase stock, can fall under the wash sale rule. That’s because the wash sale rule applies to losses from assets classified as securities for federal income tax purposes.

Are Digital-Asset Transactions Reported on 1099s?

There are several types of Forms 1099. Taxpayers normally receive 1099s near the beginning of the year following the year that a payment is received. For 2024, crypto transactions are most commonly reported on Form 1099-MISC, Form 1099-K, Form 1099-B or Form 1099-DA. If you receive one of these forms, the IRS receives one, too. If you simply make a payment using crypto, you won’t receive a Form 1099.

Are Businesses Required to File Form 8300 for Receipts of Crypto Payments?

Businesses must use Form 8300, “Report of Cash Payments Over $10,000 Received in a Trade or Business,” to report to the IRS when they receive more than $10,000 in cash in one transaction or multiple related transactions. The IRS plans to issue regulations on when businesses that receive more than $10,000 in crypto payments must file a Form 8300 or the equivalent. For now, however, no Form 8300 filings are required for crypto receipts.

For More Information

If you had digital-asset transactions in 2024, gather the records for these transactions. Consult your tax advisor to help analyze your transactions and properly report them for federal and state income tax purposes.

Copyright 2025

This article appeared in Walz Group’s February 17, 2025 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.