How to Report Cryptocurrency Transactions for Business and Individual Clients

Under IRS Notice 2014-21, virtual currency is treated as property for federal tax purposes — not currency. Every disposal of cryptocurrency, whether sold for dollars, exchanged for a different coin, or used to purchase goods or services, is a taxable event requiring gain or loss recognition under IRC §1001. For clients who have been active in crypto markets, the reporting complexity scales quickly: a client who executed 200 trades in 2025 has 200 separate taxable events, each requiring a cost basis, a proceeds figure, and a holding period determination. This guide covers the classification rules, cost basis methods, Form 8949 mechanics, treatment of mining and staking income, and the record requirements CPAs must establish with clients before the data is lost.

Prerequisites

  • Complete transaction history from every exchange the client used: Coinbase, Kraken, Binance.US, Gemini, Robinhood, or any other platform where purchases, sales, or exchanges occurred
  • Records of any off-exchange transactions: peer-to-peer sales, DeFi protocol interactions, NFT purchases or sales, and crypto received as payment for services
  • Wallet addresses for any self-custody holdings (hardware wallets, software wallets) where transfers occurred
  • Client's cost basis for all holdings, if known — many clients bought crypto across multiple years and the acquisition dates and prices may require reconstruction from exchange records or blockchain explorers
  • For mining or staking clients: records of dates and fair market values of all amounts received, which are reportable as ordinary income in the year received

Step 1: Identify Every Taxable Event

Not all crypto activity triggers income recognition. Before building Form 8949, sort the client's transactions into taxable and non-taxable events.

Taxable events — each requires gain or loss recognition:

  • Selling cryptocurrency for U.S. dollars or other fiat currency
  • Exchanging one cryptocurrency for another (e.g., trading Bitcoin for Ethereum) — Revenue Ruling 2019-24 and Notice 2014-21 confirm this is a realization event; IRC §1031 like-kind exchange treatment does not apply to cryptocurrency after the Tax Cuts and Jobs Act of 2017, which restricted §1031 to real property only. For the complete §1031 mechanics for real estate clients, see How to Execute a 1031 Like-Kind Exchange for Real Estate Clients.
  • Using cryptocurrency to purchase goods or services — the fair market value of the property or services received equals the amount realized
  • Receiving cryptocurrency as payment for services rendered — ordinary income at FMV on the date of receipt
  • Hard fork proceeds where the taxpayer receives new currency (Revenue Ruling 2019-24, Q&A 1-5)
  • Airdrop receipts — ordinary income at FMV when the taxpayer has dominion and control (Revenue Ruling 2019-24)
  • Mining income — ordinary income at FMV when received (Notice 2014-21, Q&As 8-9)
  • Staking rewards — ordinary income at FMV when received (Revenue Ruling 2023-14; the IRS ruled staking rewards taxable in the year received, rejecting the argument that newly created tokens have zero basis until sold)

Non-taxable events — no recognition required:

  • Purchasing cryptocurrency with dollars (taxable only at disposition)
  • Transferring cryptocurrency between wallets the client owns (document the transfer to establish the cost basis carries with the asset)
  • Gifting cryptocurrency — no gain or loss to the donor at time of transfer; the recipient takes the donor's adjusted basis and holding period
  • Receiving cryptocurrency as a gift (basis and holding period depend on whether disposition is at a gain or loss)
  • Buying cryptocurrency as a contribution to a charitable organization (a charitable deduction may be available; a qualified appraisal may be required for non-cash contributions above $5,000)

Step 2: Classify Each Transaction by Type and Holding Period

For each taxable disposal, determine two things: the character of the gain or loss (capital vs. ordinary) and the holding period.

Capital vs. ordinary:

Gains and losses from selling or exchanging cryptocurrency held as an investment are capital gains and losses under IRC §1221. Cryptocurrency held as inventory — by a trader or dealer in digital assets — generates ordinary income. For most individual and business clients, cryptocurrency is a capital asset.

Mining income and staking rewards are ordinary income in the year received, regardless of how long the coins are subsequently held. The cost basis of mined or staked coins equals the FMV at the time they were received as income — which becomes the starting point for the capital gain or loss calculation when the coins are later sold.

Holding period for capital gain characterization:

Holding Period Tax Treatment
12 months or less from date of acquisition Short-term capital gain/loss — taxed at ordinary income rates (IRC §1222(1))
More than 12 months from date of acquisition Long-term capital gain/loss — taxed at 0%, 15%, or 20% depending on taxable income (IRC §1222(3))

The combined federal long-term capital gains rate plus the 3.8% Net Investment Income Tax (IRC §1411) can reach 23.8% for high-income clients — substantially below short-term rates at the top marginal bracket (37%). Holding period tracking is not administrative; it has a direct dollar impact.

NFTs: IRS Notice 2023-27 indicates the IRS may treat certain NFTs as collectibles — subject to the 28% maximum rate rather than the standard 20% long-term capital gains rate (IRC §1(h)(5)). The determining factor is whether the underlying asset the NFT represents is itself a collectible under IRC §408(m). An NFT representing digital art with no physical backing may fall into this category. Until further guidance clarifies the full scope, flag NFT disposals for elevated rate analysis.

Step 3: Calculate Gain or Loss on Each Disposal

Gain or loss on each disposal is the amount realized minus the adjusted basis (IRC §1001(a)).

Amount realized: The fair market value of what the client received — in dollars if sold for cash; in the FMV of the asset received if exchanged for another cryptocurrency or goods; or the FMV of the cryptocurrency itself on the date of the disposal if used to pay for services or goods.

Adjusted basis: The cost basis established when the client acquired the cryptocurrency, plus any amounts included in income at acquisition (e.g., if the client received crypto as payment, the amount included in income becomes the basis). Brokerage commissions and transaction fees paid at acquisition are included in basis. Fees paid at disposition reduce the amount realized.

FMV determination: The IRS requires use of the fair market value on the exchange on which the cryptocurrency was traded (Notice 2014-21, Q&A 5). For actively traded coins, this is the price on the relevant exchange as of the date and time of the transaction. For thinly traded or obscure tokens, reasonable valuation from available market data is required. Document the source of FMV figures — exchange confirmation records, blockchain explorer timestamps, or exchange API data — for every disposal.

Step 4: Select and Document the Cost Basis Accounting Method

When a client holds multiple lots of the same cryptocurrency acquired at different prices and dates, a cost basis accounting method governs which lots are treated as sold when the client makes a partial disposal.

FIFO (First-In, First-Out): The oldest lots are treated as sold first. This is the IRS default if the client does not identify specific units at the time of sale (Notice 2014-21, Q&A 36 implies specific identification as the alternative). In bull markets, FIFO tends to produce the largest gains because the oldest lots are often the lowest-cost lots.

Specific Identification: The client identifies exactly which lot or lots are being sold at the time of each transaction, before the disposal is executed. This method is explicitly permitted (Notice 2014-21) and allows the client to optimize the selection — choosing high-cost lots to minimize gain, or choosing lots with more than 12 months of holding to convert short-term gains to long-term. The identification must be contemporaneous: selecting lots after the fact does not satisfy the requirement.

HIFO (Highest-In, First-Out): Not a separately named IRS method, but achievable through specific identification by consistently selecting the highest-cost lots available. This minimizes current-period gain and is the most common strategy for clients with significant unrealized appreciation across multiple lot vintages.

Method consistency: There is no IRS requirement to apply the same method across all exchanges or all positions, but clients should document the method applied to each exchange or wallet so that the method is consistently applied within each account.

Practical note on exchange-provided basis: Major exchanges now provide cost basis reports for transactions executed on their platforms, but these reports often reflect the exchange's default method (typically FIFO) and do not account for transfers in from external wallets. Any crypto transferred from another exchange or self-custody wallet before sale may carry a cost basis the receiving exchange does not know. Reconciling these gaps is the most common source of inaccurate basis on crypto returns.

Step 5: Prepare Form 8949 and Carry to Schedule D

All cryptocurrency disposals are reported on Form 8949, which feeds into Schedule D of Form 1040 (and the applicable entity return for business clients).

Form 8949 structure:

  • Part I — Short-term transactions (property held 12 months or less): Tax rate is ordinary income rate
  • Part II — Long-term transactions (property held more than 12 months): Tax rate is preferential capital gains rate

For each disposal, enter on Form 8949:

  • Description of property (e.g., "0.5 BTC" or "10 ETH")
  • Date acquired (specific date, or "Various" if multiple lots)
  • Date sold or disposed
  • Proceeds (gross, before any commissions deducted at disposition)
  • Cost or other basis
  • Adjustments, if any (wash-sale disallowances, other adjustments in columns f and g)
  • Gain or loss

Box selection: Form 8949 requires a checkmark for the basis category:

  • Box A / D: Reported on Form 1099-B with basis reported to IRS
  • Box B / E: Reported on Form 1099-B without basis reported to IRS
  • Box C / F: Not reported on 1099-B (most crypto from decentralized exchanges, peer-to-peer, and older centralized exchange transactions)

Starting with tax year 2025, brokers — including cryptocurrency exchanges that qualify as brokers under the definition in the Infrastructure Investment and Jobs Act (P.L. 117-58) — are required to issue Form 1099-DA (Digital Asset) to customers and to the IRS, reporting gross proceeds from digital asset sales. Cost basis reporting requirements for cryptocurrency are being phased in separately and are subject to ongoing IRS regulatory guidance. The IRS has issued regulations (T.D. 9945, as amended) addressing which entities qualify as brokers, but the rules for decentralized exchanges and peer-to-peer platforms remain in development.

Aggregation: Clients with hundreds of transactions can aggregate on Form 8949 if all transactions have the same basis type (e.g., all are Box C transactions not reported on a 1099). Attach a statement with the transaction-by-transaction detail. Tax software that imports exchange records handles this automatically.

Step 6: Report Ordinary Income from Mining, Staking, and Service Payments

Income from crypto activity that does not arise from a capital disposition is ordinary income reportable in the year received, regardless of whether the coins are later sold.

Mining income (Notice 2014-21, Q&As 8-9):

  • If the client mines cryptocurrency as a trade or business: ordinary income at FMV when received; deductible mining expenses (electricity, hardware depreciation, pool fees) on Schedule C; self-employment tax applies to net profit
  • If mining is not a trade or business (rare; requires no regularity or profit motive): income is ordinary income, but mining expenses are miscellaneous itemized deductions subject to the 2% floor — generally not deductible post-TCJA

Staking rewards (Revenue Ruling 2023-14):

The IRS ruled in Revenue Ruling 2023-14 that staking rewards received by a cash-basis taxpayer are includible in gross income at the FMV of the validated tokens at the date of receipt, rejecting the argument that new tokens created through staking have zero basis until sold. The FMV at receipt becomes the cost basis for the subsequent disposition.

Crypto received as payment for services:

Report at FMV on the date of receipt. For sole proprietors and partnerships, report on Schedule C or Schedule E. For S-Corp and C-Corp clients, report as ordinary business income. The FMV at receipt becomes the cost basis for any future disposal.

Form 1099-NEC or 1099-MISC obligations: Businesses that pay for services with cryptocurrency are subject to the same 1099-NEC reporting requirements as cash payments — if the payment exceeds $600 in a calendar year to a non-corporate recipient. FMV at the time of payment is the reportable amount.

Step 7: Answer the Form 1040 Digital Asset Question

Beginning in 2019 (and made permanent in 2021), Form 1040 includes a mandatory disclosure question at the top of the return (currently on Schedule 1, line 1):

"At any time during [tax year], did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?"

The question must be answered "Yes" or "No." Answering "No" when the client had taxable crypto activity is a materially false statement on the return and can expose both the client and the practitioner to accuracy-related and fraud penalties.

When the answer is "No": The client neither received nor disposed of any digital assets during the year. Simply holding cryptocurrency without any transaction activity does not require a "Yes" response.

When the answer is "Yes": Any taxable receipt (mining rewards, staking income, payment in crypto) or any disposal (sale, exchange, use to purchase goods) during the year requires a "Yes" — followed by reporting the details on Form 8949 and Schedule D.

Common Mistakes

Treating crypto-to-crypto exchanges as non-taxable. The exchange of one cryptocurrency for another is a taxable disposition of the first coin and an acquisition of the second at the FMV of the coins received. Clients who traded frequently between Bitcoin, Ethereum, and altcoins without reporting the intermediate disposals have significant unreported income exposure.

Ignoring small transactions and microtransactions. Every use of cryptocurrency to purchase goods or services — including small purchases, subscription payments, and DeFi gas fees paid in tokens — is a taxable disposal. There is no de minimis threshold under current law. High-frequency DeFi users can have thousands of taxable events from protocol interactions alone.

Using exchange-provided basis without reconciling transfers. If a client transferred cryptocurrency to an exchange from an external wallet, the exchange's basis records will show a zero or unknown basis for those transferred coins. Using the exchange report without reconciling the original acquisition cost overstates gains — or leaves the return with missing basis, which the IRS may default to zero.

Conflating the wash-sale rule with crypto trading. The wash-sale rule under IRC §1091 does not currently apply to cryptocurrency because cryptocurrency is property, not "stock or securities" as defined under the statute. A client who sells Bitcoin at a loss and repurchases it immediately does not trigger a wash-sale disallowance. This creates a legitimate tax-loss harvesting opportunity unique to crypto — selling depreciated positions to realize losses and immediately repurchasing without losing exposure. Note that proposed legislation has periodically sought to extend the wash-sale rule to crypto; monitor for legislative changes. For the complete loss-harvesting framework and how crypto losses interact with other capital losses, see Year-End Tax Planning for Business Clients.

Failing to establish record requirements with clients early. Exchange account history is often limited to 90 days or 3 years on some platforms; clients who close accounts lose access permanently. Transaction histories must be exported and preserved contemporaneously. The IRS requires records supporting every return position to be retained for the applicable statute period — at minimum seven years. For digital asset clients, this includes exchange statements, blockchain transaction IDs, wallet addresses, and the FMV data source for every transaction. For the complete document retention framework, see Document Retention Requirements for Business Clients.

Applying §1031 to crypto-to-crypto exchanges before 2018. For tax years before 2018, some practitioners treated crypto-to-crypto exchanges as IRC §1031 like-kind exchanges. The IRS's position has consistently been that this was not available for personal property even before the TCJA, though the issue was contested. For clients with pre-2018 transactions reported under §1031, review the statute of limitations and consider whether amended returns or a disclosure position is appropriate.

FAQs

Is cryptocurrency subject to the wash-sale rule?

No, not under current law. IRC §1091 applies to "stock or securities." Cryptocurrency is property under IRS Notice 2014-21, not a security. A client can sell crypto at a loss and immediately repurchase the same coin without triggering a wash-sale disallowance. This is a meaningful distinction from equity investing and creates tax-loss harvesting opportunities that are not available in stock portfolios. Congress has considered extending the wash-sale rule to digital assets in multiple legislative sessions; check for updates at the start of each filing season.

How is staking income different from interest income?

Staking income is ordinary income reportable at the FMV of the tokens received, per Revenue Ruling 2023-14. Interest income (e.g., from a crypto lending platform) is also ordinary income but is reported under IRC §61 as interest rather than as a reward. The distinction matters for self-employment tax: staking and mining by an individual not operating a trade or business does not generate self-employment income; but mining or staking conducted as a trade or business does generate SE tax liability on net profit. Clients who are passive stakers — locking tokens in a protocol without operating a business — generally do not owe SE tax on staking rewards.

What records does a client need to substantiate crypto transactions?

For each acquisition: date acquired, purchase price (in dollars), exchange fees included in basis, and the platform or source of acquisition. For each disposal: date sold or disposed, proceeds received (in dollars or FMV of assets received), exchange fees, and the specific lots applied if using specific identification. Supporting documentation: exchange transaction histories, 1099-DA or 1099-B issued by the exchange, blockchain transaction IDs, and the FMV data source (exchange price at time of transaction). The IRS standard under IRC §6001 requires records sufficient to establish the correct tax liability. For clients who used multiple exchanges and wallets, consolidating records from all sources before the exchange history becomes unavailable is critical. For the full retention framework, see Document Retention Requirements for Business Clients.

Does the IRS know about crypto transactions that aren't reported on a 1099?

Increasingly, yes. Major exchanges such as Coinbase and Kraken have complied with IRS summonses producing account-holder data for users with significant transaction volume. Starting in 2026, broker-issued Form 1099-DA for 2025 transactions will create information-return matching exposure for most centralized exchange transactions. Additionally, blockchain data is publicly accessible — the IRS Criminal Investigation division has contracted with blockchain analytics firms including Chainalysis to trace wallet activity and identify unreported income. The IRS has also issued virtual currency letters (Letter 6174, Letter 6174-A, Letter 6173) to known exchange customers in prior years. Clients who have not reported crypto transactions in prior open years should evaluate amended returns or voluntary disclosure options. For the complete IRS audit selection and examination framework, see IRS Audit Triggers and Defense.

How are crypto losses deducted?

Crypto losses are capital losses. Net capital losses offset capital gains first. If losses exceed gains, up to $3,000 of net capital loss is deductible against ordinary income per year for individual filers (IRC §1211(b)); the remainder carries forward indefinitely. For clients with large unrealized losses, the absence of the wash-sale rule means losses can be harvested without disrupting the portfolio position — a year-end planning opportunity that does not exist for stock holdings. For how capital loss deductions interact with itemized deductions and overall tax liability, see Standard Deduction vs Itemized Deductions: How CPAs Decide for Clients in 2025.

What is Form 1099-DA and when does it apply?

Form 1099-DA (Digital Assets) is a new information return required under the Infrastructure Investment and Jobs Act (P.L. 117-58). Starting for tax year 2025, brokers — including centralized cryptocurrency exchanges — are required to report gross proceeds from digital asset sales to customers and to the IRS. The form covers sales, exchanges, and other disposals. Cost basis reporting for 1099-DA purposes is being phased in separately; initial regulations require brokers to report basis for assets acquired on their platform beginning with 2026 transactions. Decentralized exchanges, self-custody wallets, and many DeFi protocols may not be subject to the same reporting requirements, though the IRS continues to issue guidance extending the broker definition. For CPAs, 1099-DA introduces information-return matching for crypto similar to the existing 1099-B matching for securities — reducing the gap between what clients report and what the IRS can verify.

Can an S-Corp or LLC hold and trade cryptocurrency?

Yes. Cryptocurrency held by a pass-through entity is treated the same as cryptocurrency held individually — as property, with gain or loss recognized on each disposal. For S-Corps, gains and losses flow through to shareholders on Schedule K-1. For LLCs taxed as partnerships, gains and losses are allocated per the partnership agreement and reported on partners' K-1s. Business entities that hold cryptocurrency as a capital asset — not inventory — recognize capital gains and losses on disposal. Entities that buy and sell cryptocurrency as a trade or business (crypto dealers) recognize ordinary income. Mining and staking at the entity level creates ordinary income flowing through to owners on Schedule K-1, and may be subject to self-employment tax for partners and sole proprietors.

Arvori helps CPAs track cryptocurrency reporting obligations across client portfolios, flag clients with unreported digital asset activity, and maintain the documentation trail needed to support Form 8949 at examination. Learn more at arvori.app.