How to File Crypto Taxes

You file crypto taxes by reporting every sale, trade, or disposal of cryptocurrency on IRS Form 8949, then summarizing your total capital gains and losses on Schedule D of your Form 1040. You must also report crypto received as ordinary income — from mining, staking, airdrops, or payment for services — on Schedule 1 or Schedule C.

Why the IRS Requires Crypto Tax Reporting

Since IRS Notice 2014-21, the IRS has treated cryptocurrency as property, not currency. This means every disposal of crypto — whether you sell it for dollars, trade it for another token, or spend it on goods — creates a taxable event subject to capital gains rules, just like selling stocks or real estate.

The IRS has steadily increased enforcement. Starting in tax year 2019, the Form 1040 added a direct question asking whether you received, sold, or otherwise disposed of any digital assets. Answering this question incorrectly can constitute a false statement on a federal tax return. In 2023, the IRS updated the question to cover all digital assets, and by 2025, the Infrastructure Investment and Jobs Act (Public Law 117-58, Section 80603) introduced broker reporting requirements for centralized exchanges via Form 1099-DA.

Step 1: Gather Your Transaction Records

Before you can calculate anything, you need a complete record of every crypto transaction you made during the tax year. This includes:

Buys: Date, amount, price paid (including fees)
Sells: Date, amount, proceeds received (after fees)
Trades: Crypto-to-crypto swaps count as two transactions — a sale of one asset and a purchase of another
Income: Mining rewards, staking yields, airdrops, payments received in crypto
DeFi activity: DEX swaps, liquidity pool deposits/withdrawals, yield farming rewards

Most centralized exchanges let you download CSV transaction histories. For DeFi, you may need to use blockchain explorers like Etherscan or Solscan to reconstruct your on-chain activity.

According to IRS Publication 544 (Sales and Other Dispositions of Assets), taxpayers bear the burden of substantiating their cost basis. If you cannot prove your cost basis, the IRS may treat it as zero — meaning your entire proceeds become taxable gain.

Step 2: Calculate Your Cost Basis

Your cost basis is what you originally paid for the crypto, including transaction fees. When you dispose of crypto, your gain or loss equals:

Gain or Loss = Proceeds - Cost Basis

The IRS recognizes two cost basis identification methods:

FIFO (First In, First Out): The default method. Your oldest coins are treated as sold first.
Specific Identification: You choose exactly which coins (lots) you are selling. This includes strategies like HIFO (Highest In, First Out) and LIFO (Last In, First Out).

Per Revenue Ruling 2019-24, if you do not specifically identify which units you are disposing of, the IRS defaults to FIFO. To use Specific Identification, you must keep adequate records showing which lot you sold and when it was acquired.

Example Calculation

Suppose you bought 1 BTC on January 15, 2025 for $42,000 and another 1 BTC on June 3, 2025 for $68,000. On December 10, 2025, you sell 1 BTC for $95,000.

Using FIFO: You sell the January lot. Gain = $95,000 - $42,000 = $53,000 (long-term, held over 1 year if sold after January 15, 2026).
Using HIFO: You sell the June lot. Gain = $95,000 - $68,000 = $27,000 (short-term, held under 1 year).

The method you choose can significantly affect your tax bill.

Step 3: Complete Form 8949

Form 8949 is where you list each individual crypto disposal. The form has two parts:

Part I: Short-term transactions (assets held one year or less)
Part II: Long-term transactions (assets held more than one year)

Each part requires you to check a box indicating whether basis was reported to the IRS:

Box A: Short-term, basis reported on 1099-B/1099-DA (covered transactions)
Box B: Short-term, basis NOT reported to the IRS
Box C: Short-term, no 1099 received
Box D: Long-term, basis reported (covered)
Box E: Long-term, basis NOT reported
Box F: Long-term, no 1099 received

For each transaction, you fill in columns (a) through (h): description of property, date acquired, date sold, proceeds, cost basis, adjustment code, adjustment amount, and gain or loss.

If you have wash sale adjustments, use code W in the adjustment column. For fee-related adjustments, use code E. The IRS issued proposed regulations in 2024 (REG-106013-19) extending wash sale rules to digital assets starting in 2025, though implementation timelines have shifted — check current IRS guidance for the applicable tax year.

Step 4: File Schedule D

Schedule D summarizes your Form 8949 totals. It separates short-term and long-term gains, then combines them into a net capital gain or loss.

Key lines on Schedule D:

Line 7: Net short-term capital gain or loss (from Part I of Form 8949)
Line 15: Net long-term capital gain or loss (from Part II of Form 8949)
Line 16: Combined net gain or loss

If you have a net capital loss, you can deduct up to $3,000 per year ($1,500 if married filing separately) against ordinary income, per IRC Section 1211(b). Excess losses carry forward to future tax years indefinitely.

Step 5: Report Ordinary Income

Not all crypto income is a capital gain. The following are taxed as ordinary income at your marginal rate (up to 37% for the 2025 tax year, per IRS Revenue Procedure 2024-40):

Mining income: Report on Schedule C if you mine as a business, or Schedule 1 if occasional
Staking rewards: Taxable as income at fair market value when received (per IRS Revenue Ruling 2023-14)
Airdrops: Taxable at fair market value when you gain dominion and control
Payments for services: Report on Schedule C or as wages

Your cost basis for crypto received as income is the fair market value at the time of receipt.

Capital Gains Tax Rates

For the 2025 tax year, long-term capital gains rates are:

0%: Single filers with taxable income up to $48,350; married filing jointly up to $96,700
15%: Single filers $48,351 to $533,400; married filing jointly $96,701 to $600,050
20%: Income above those thresholds

Additionally, the Net Investment Income Tax (NIIT) adds 3.8% on investment income for individuals with modified adjusted gross income above $200,000 ($250,000 married filing jointly), per IRC Section 1411.

Short-term capital gains are taxed at your ordinary income rate, which can be significantly higher.

DeFi Considerations

On April 10, 2025, Congress repealed the DeFi broker reporting rule using the Congressional Review Act (Public Law 119-7). This means decentralized exchanges and DeFi protocols are not required to issue 1099-DA forms. However, your tax obligations remain unchanged — you must still report all DeFi transactions.

DeFi creates unique challenges:

DEX swaps are taxable disposals, just like selling on Coinbase
Liquidity pool deposits may trigger taxable events depending on the protocol mechanics
Yield farming rewards are ordinary income when received
Cross-chain bridges may or may not be taxable — IRS guidance is still evolving

Without broker reporting, the burden falls entirely on you to track and report these transactions accurately.

Common Mistakes to Avoid

Forgetting crypto-to-crypto trades: Swapping ETH for SOL is a taxable event, even if you never converted to USD.
Ignoring small transactions: Every transaction matters, regardless of size.
Using the wrong cost basis: Applying a method inconsistently can trigger an audit.
Missing income from staking/airdrops: These are taxable when received, not when sold.
Not reporting losses: Capital losses reduce your tax bill — claim them.
Answering the digital asset question incorrectly: The IRS flags returns with crypto activity that answer "No."

FAQ

Do I need to report crypto if I did not sell any?

If you only bought and held cryptocurrency, you generally do not have a capital gains reporting obligation. However, if you received crypto as income (mining, staking, airdrops, or payment), you must report that as ordinary income. You must also answer "Yes" to the digital asset question on Form 1040 if you received crypto in any transaction.

What if I lost my transaction records?

You are responsible for maintaining adequate records under IRC Section 6001. If records are lost, reconstruct them using exchange account histories, blockchain explorer data, email confirmations, and bank/credit card statements. Tools like dTax can import CSV files from 23 different exchanges to help reconstruct your history. If you truly cannot establish cost basis, the IRS may treat it as zero, resulting in maximum taxable gain.

How do I report staking and mining income?

Per IRS Revenue Ruling 2023-14, staking rewards are taxable as ordinary income at the fair market value when you receive them (i.e., when the rewards are credited to your wallet and you have dominion and control). Mining income follows the same rule. Report it on Schedule 1 (Line 8z) for occasional activity, or Schedule C if you operate as a business. Your cost basis for future sales equals the fair market value at the time you received the rewards.