Crypto Tax Reporting: What You Need to Know in 2025

The 2025 Crypto Tax Landscape

Cryptocurrency tax enforcement has intensified significantly heading into 2025. The IRS now requires every taxpayer to answer a digital asset question on the front page of Form 1040, and new broker reporting rules mean exchanges will send both you and the IRS detailed transaction records. Ignoring crypto taxes is no longer a viable strategy.

This guide focuses on the practical reporting mechanics: what forms you need, how to calculate what you owe, and how to handle the trickiest scenarios.

The New Form 1099-DA

Starting with the 2025 tax year, centralized cryptocurrency exchanges and brokers must issue Form 1099-DA (Digital Asset) to users who sold, exchanged, or otherwise disposed of digital assets. This form reports:

Gross proceeds from each transaction

Date of sale or exchange

Cost basis (when available)

Whether the holding period was short-term or long-term

This is a major shift. Previously, crypto users received Form 1099-K (which only reported gross transaction amounts) or 1099-B (from some exchanges). The new 1099-DA provides the IRS with transaction-level detail similar to stock brokerage reporting.

What This Means for You

The IRS will now be able to match your reported gains and losses against exchange-reported data. Under-reporting or failing to report crypto transactions will be flagged automatically. Make sure your tax return matches the 1099-DA forms you receive.

What Triggers a Tax Event

Taxable Events

Selling crypto for cash: Selling Bitcoin for US dollars triggers a capital gain or loss based on the difference between your sale price and cost basis.

Trading one crypto for another: Swapping Ethereum for Solana is a taxable disposal of Ethereum. Your gain or loss is calculated based on Ethereum's cost basis versus its fair market value at the time of the swap.

Spending crypto on purchases: Buying a coffee with Bitcoin triggers a capital gain or loss on the Bitcoin used.

Receiving crypto as income: Mining rewards, staking rewards, airdrops, and crypto earned for services are taxed as ordinary income at fair market value when received.

Non-Taxable Events

Buying crypto with US dollars

Transferring crypto between your own wallets

Gifting crypto (gift tax rules may apply above $18,000 per recipient per year)

Donating crypto to a qualified charity

Calculating Your Gains and Losses

The formula is straightforward:

Capital Gain (or Loss) = Proceeds - Cost Basis - Transaction Fees

Cost Basis Methods

When you have purchased the same cryptocurrency at different prices over time, you need an accounting method to determine which coins you sold:

FIFO (First In, First Out): The IRS default. Assumes you sold your oldest coins first. Often results in larger gains during bull markets since older coins typically have lower cost basis.

Specific Identification: You designate exactly which coins (or lots) you are selling. This allows you to sell high-basis coins first to minimize gains. Requires adequate records showing which specific units were disposed of.

The IRS has not explicitly approved LIFO or average cost for crypto. Use FIFO or specific identification to stay on safe ground.

Short-Term vs Long-Term Rates

Crypto held for one year or less before selling generates short-term capital gains, taxed at your ordinary income rate (10-37%). Crypto held for more than one year generates long-term capital gains, taxed at preferential rates (0%, 15%, or 20% depending on income). Use the crypto tax calculator to model your specific situation.

Reporting on Your Tax Return

Form 8949: Sales and Dispositions

Report each crypto transaction on Form 8949 with:

Description of property (e.g., "0.5 BTC")

Date acquired

Date sold or disposed

Proceeds

Cost basis

Gain or loss

Schedule D: Capital Gains Summary

Form 8949 totals flow to Schedule D, which summarizes your total short-term and long-term gains and losses.

Schedule 1 or Schedule C: Crypto Income

Mining, staking, and airdrop income is reported as:

Hobby mining: Other income on Schedule 1

Business mining: Schedule C (subject to self-employment tax)

Staking rewards: Other income or Schedule C depending on whether it constitutes a trade or business

DeFi Tax Reporting Challenges

Decentralized finance creates scenarios that do not map neatly to traditional tax reporting:

Liquidity Pools

Adding tokens to a liquidity pool may constitute a taxable exchange. You receive LP tokens in return, and the IRS may view this as swapping your original tokens for a new asset. When you remove liquidity, another taxable event may occur.

Track the value of tokens when entering and exiting pools. The difference between your deposit value and withdrawal value, plus any trading fees earned, forms your taxable income or gain.

Yield Farming and Lending

Interest earned from DeFi lending platforms (Aave, Compound) is taxable as ordinary income when received. The cost basis of the received tokens is the fair market value at receipt. Subsequent sale creates a separate capital gain or loss event.

Wrapped Tokens and Bridges

Wrapping ETH to WETH or bridging tokens across chains presents unresolved tax questions. The conservative approach treats each as a taxable exchange. Keep detailed records of every bridge and wrap transaction with timestamps and values.

Tax Loss Harvesting: The Crypto Advantage

As of 2025, the wash sale rule that applies to stocks and securities does not apply to cryptocurrency. This means you can:

Sell a crypto position at a loss

Immediately repurchase the same cryptocurrency

Claim the loss on your tax return

This is a powerful strategy during market downturns. Harvest losses to offset gains from other crypto trades or deduct up to $3,000 against ordinary income per year, with unlimited carryforward.

Caution: Proposed legislation could extend wash sale rules to crypto. Monitor legislative developments and consider this strategy while it remains available.

Record Keeping Best Practices

For each transaction, document:

Exact date and time (UTC)

Amount of crypto involved

Fair market value in USD at the time

Exchange or platform used

Transaction hash (for on-chain transactions)

Fees paid

Purpose of transaction

Connecting Multiple Exchanges and Wallets

Most active crypto users have accounts on multiple exchanges and use various wallets. Consolidating all this data into a single tax report requires either manual effort or automated tools.

Taxation.ai connects to major exchanges (Coinbase, Kraken, Binance, Gemini, and more) and supports wallet imports via CSV or API. The platform reconciles transfers between your own wallets, matches buys with sells using your chosen accounting method, and generates Form 8949 automatically.

Handling Missing Cost Basis

If you purchased crypto years ago and no longer have records of the original cost, you have several options:

Check exchange records and email confirmations from the purchase period

Use blockchain explorers to identify transaction dates, then look up historical prices

As a last resort, use $0 cost basis (which means you pay tax on the full proceeds)

Reconstructing cost basis is tedious but worth the effort. A $0 basis on a $50,000 sale means $50,000 in taxable gains versus potentially much less with proper documentation.

Staying Compliant Going Forward

The IRS has made crypto enforcement a priority. The agency has invested in blockchain analytics tools, issued John Doe summonses to major exchanges, and established a dedicated digital assets unit.

The best approach: report everything accurately, keep thorough records, and use specialized software to handle the complexity. Taxation.ai's crypto module calculates gains across all your exchanges, identifies tax-loss harvesting opportunities, and generates IRS-ready reports for your return.