Whether you’re casually trading meme coins or deeply immersed in DeFi, understanding your tax obligations now could help you avoid headaches—or penalties—later.
For much of its existence, the U.S. Internal Revenue Service ignored crypto. That changed in 2019 under the Trump Administration, when the IRS began requiring citizens to report their crypto holdings. A crypto-related question appeared on Schedule 1 of Form 1040 in 2020, asking taxpayers whether they had made any cryptocurrency transactions during the year.
“You may have to report transactions with digital assets such as cryptocurrency and non fungible tokens (NFTs) on your tax return,” the IRS said in a post. “Income from digital assets is taxable.”
This article will examine current crypto tax policies in 2025, how Donald Trump’s return to office influences the crypto regulatory landscape, and what these changes mean for investors. Whether you’re headed to the moon—or facing an audit—your outcome depends on how well you navigate the complex U.S. tax system.
What is taxable in the crypto world?
Despite its name, cryptocurrency is not currency—at least not as far as the United States government is concerned.
Purchasing cryptocurrency, by itself, is not a taxable event. Buying and holding digital assets like Bitcoin, Ethereum, or Solana does not trigger tax liability. However, crypto becomes taxable when sold, traded, or used to purchase goods or services—essentially, when a transaction occurs and a gain or loss is realized.
“Since the IRS classifies cryptocurrency as property, most transactions are taxable,” Navin Sethi, partner at Eisner Advisory Group LLC, told Decrypt. “Examples of reportable transactions include but are not limited to sales to fiat, swaps to stablecoins or other cryptocurrency, and purchases/sales of NFTs.”
Capital gains and losses
Capital gains taxes apply to profits from selling, trading, or using cryptocurrencies. Investors may owe capital gains tax if they made more money from selling their digital asset than they paid for it. The amount owed, however, depends on the length the asset was held for, and the investor’s tax bracket.
- Short-term gains refer to assets held for less than one year that are taxed at your ordinary income rate.
- Long-term gains, which refer to assets held for over a year, are taxed at reduced rates of 0%, 15%, or 20%, depending on income.
Sethi noted that cryptocurrency transactions are reported on Schedule D of IRS Form 1040 as capital gains or losses. Whether a transaction is considered short-term or long-term depends on how long the asset was held. If held for over a year, it qualifies for long-term capital gains treatment, typically with a lower tax rate.
He added that the IRS is tightening its crypto reporting rules, requiring investors to track and report gains and losses by individual wallets rather than using a universal basis method.
“Starting January 1, 2025, taxpayers can no longer use the universal basis method and instead must track their basis by wallet,” Sethi said. “Special situations could impact the character or treatment of the reporting; consult your tax advisor about your personal tax situation.”
Income events
The IRS treats several types of cryptocurrency activity as ordinary income, meaning they’re taxable under regular income tax rules—not capital gains. In these cases, the fair market value on the day the crypto was received determines how much is owed.
Here’s what counts as taxable income:
- Getting paid in crypto: Whether it’s for goods, services, or a job, if you’re paid in cryptocurrency, the value at the time you receive it is taxed as income.
- Mining rewards: Any crypto earned from mining is taxable based on its value when you receive it. If you’re mining as a business, it could also be hit with self-employment taxes.
- Staking rewards: Like mining, staking rewards are taxed as income based on their fair market value at that time.
- Airdrops and hard forks: If you receive new tokens from an airdrop or a hard fork, the IRS considers them income once you can access them and taxes them accordingly.
- DeFi interest or yield: Earnings from lending your crypto or participating in DeFi protocols (like earning yield or interest) are also taxable as ordinary income.
- Referral bonuses and promos: Any incentives, such as referral rewards or “play-to-earn” campaigns, are taxable income when you receive the crypto. However, the specific tax treatment may vary depending on the nature of the reward and how it’s obtained within the game.
In all these scenarios, the dollar value of the crypto at the time of receipt determines your tax liability.
“With crypto treated as property, taxpayers need to treat each transaction as a taxable event, calculating gains or losses based on their cost basis and holding period,” Derek Wride, Founder of crypto tax software CPAI, told Decrypt. “In 2025, this will become even more critical as IRS enforcement and new reporting requirements ramp up.”
Capital gains are tricky enough in traditional finance, but as Wride explained, they get even more complicated with cryptocurrency, where every action is a transaction.
“The challenge with crypto is tracking your cost basis over thousands of small transactions across wallets and exchanges, often with incomplete or conflicting data,” he said.
NFTs and collectibles
NFTs may be taxed as collectibles—which carry a higher 28% tax rate on long-term capital gains—if they represent an underlying collectible item. This is higher than the typical 20% rate for other long-term capital assets.
To determine whether an NFT is a collectible, the IRS uses a “look-through analysis,” examining what the NFT represents. If it points to things like artwork, antiques, gems, precious metals, stamps, coins, or alcoholic beverages, it may be classified as a collectible.
Short-term gains on NFTs held for less than a year are taxed as ordinary income, ranging from 10% to 37%.
All NFT-related activities—buying, selling, trading, depositing, or transferring—must be reported on your tax return. Because guidance is still evolving, consult a tax professional to ensure compliance.
What’s new in 2025?
Here are the key IRS updates taking effect in 2025:
- New Tax Form (1099-DA): Under Form 1099-DA, U.S. cryptocurrency exchanges must begin reporting user transactions, gross proceeds from crypto sales and trades using Form 1099-DA. Beginning Jan. 1, 2026, brokers must also report the cost basis of crypto transactions to help investors determine gains or losses.
- Wallet-by-Wallet Accounting: Investors must now calculate the cost basis separately for each wallet. The cost basis is whatever you paid in U.S. dollars to acquire a token plus any associated fees.
- Temporary Safe Harbor: Beginning January 1 through December 31, 2025, the IRS will allow “alternative identification” methods for digital assets—giving exchanges and taxpayers time to adapt to new digital asset identification requirements.
Penalties
Failure to report crypto transactions can lead to severe fines and penalties, including:
- Fines of up to $100,000 for individuals.
- Up to 75% of unpaid tax as an additional penalty.
- Accrued interest on unpaid amounts.
- Criminal charges.
- Up to five years in prison.
It’s important to note that while enforcement is increasing, these penalties represent the most extreme causes of tax fraud.
How to calculate and report your crypto taxes
Tracking tools and software
Providing crypto tax services has become a booming industry, and several platforms are on the market that can help track transactions, calculate gains, and generate tax reports. These platforms include:
- CoinLedger, ZenLedger, and CoinTracker: Integrate with TurboTax and H&R Block.
- Koinly: Supports 23,000+ cryptocurrencies across 20+ countries.
- TokenTax: Covers DeFi, NFT, and futures trading.
- Blockpit (formerly Accointing): Supports 150+ exchanges and 60+ wallets.
- CPAI: Uses AI to automate the crypto tax preparation process.
Token-tracking software makes it easy to switch between the different cost basis methods to compare your total liability under each one. The most popular ones are:
- FIFO (first in, first out)
- LIFO (last in, first out)
- HIFO (highest in, first out)
Conclusion
With new IRS reporting requirements and increased enforcement, accurate crypto tax reporting is more important than ever. Start organizing your records as early as possible, use reliable tax software, and seek professional guidance to stay compliant—and avoid costly penalties.
As lawmakers grapple with regulating the evolving crypto space, some want to eliminate rules that don’t fit the technology.
In February 2025, the U.S. House Ways and Means Committee advanced a resolution to prevent the IRS from imposing tax reporting requirements on decentralized finance projects that would classify DeFi projects as brokers, obligating them to provide users with Form 1099 tax documents.
This move reflects growing concern that applying traditional financial rules to decentralized technologies could stifle innovation and drive activity offshore.
“As crypto tax legislation develops, I believe we’ll see some retracing of past regulatory oversteps,” Wride said. “If policymakers recognize the importance of maintaining healthy on-chain transaction volume, we could see fewer taxable events and a more rational approach to crypto taxation overall.”
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