Cryptocurrency continues to move closer to mainstream adoption, but the tax treatment of digital assets is still a gray area for many taxpayers. The IRS has made it clear that crypto is taxable, but the rules can be complex.
Whether you use digital assets for everyday purchases, accept them in your business, earn staking rewards or simply trade them, each activity carries unique tax implications. Below are four important crypto tax topics that every investor, business owner or enthusiast should be aware of.
1. Using Crypto for Purchases
Technology continues to make using cryptocurrency easier by the day and many businesses are starting to accept popular cryptocurrency as payment. Many people assume that using cryptocurrency to buy goods or services is similar to using cash or a credit card, however the IRS views each purchase as a taxable event no matter how small it is.
This means you must calculate the difference between your cost basis (what you paid for the crypto) and its fair market value on the date of purchase. Even something as small as a $4 coffee could generate a reportable gain or loss, sometimes as little as a single cent. On a positive note, cryptocurrency is not subject to wash sale rules so there is currently no need to defer losses if you rebuy the asset within 30 days.
Lawmakers have discussed the possibility of creating a de minimis exemption for small transactions, but as of now no such rule exists. Until then, taxpayers should keep detailed records or use crypto-tracking software to ensure compliance.
2. Accepting Crypto in Business
For business owners, especially sole proprietors, accepting crypto as payment can be riskier than it seems. Under current law, payments received in virtual currency are treated as ordinary income. The taxable amount is based on the fair market value of the crypto on the date it is received. If the crypto later falls in value and you sell it, you’ll incur a capital loss, but only up to $3,000 of capital losses can offset ordinary income each year (or $1,500 if married filing separately). Any additional losses are carried forward indefinitely.
In addition, sole proprietorships also face self-employment tax of 15.3% on top of income tax. This means that a sudden market crash after accepting crypto could leave you with a higher tax bill than the actual cash value of what you received.
Here is an example showing the possible “phantom tax” when accepting a volatile cryptocurrency as payment. You run a sole proprietorship, your marginal tax bracket is 22% and you have no other capital sales for the year. You receive $10,000 worth of crypto from your techy client since he told you it will be worth ten times its value by the end of the month. Unfortunately the next day it crashes and you’re forced to sell it for $100 as you need at least some cash to make it through the week.
You’ll have a capital loss of $9,900 and are only able to utilize $3,000 of it that year with the remaining $6,900 being carried forward to future years. Without going too much into the nuances, this effectively leaves you with an increase of $6,294 in taxable income and $9,235 subject to self-employment tax for this activity. Using the rates above, you’d effectively be left with an income tax increase of $1,385 and an additional $1,413 in self-employment tax even though you only ended up with $100 cash.
This is a rare situation, but it could happen if you accept various virtual currencies throughout your career. If your business isn’t well establish yet then consider declining crypto currency for payments, putting money aside to cover necessities and then purchasing your desired crypto once your other responsibilities have been met.
3. Mining and Staking Rewards
Mining and staking can be profitable ways to earn crypto, but they also create tax liabilities. Under current IRS guidance, miners and stakers are taxed on the fair market value of the coins or tokens on the day they are received. This event is considered ordinary income, not capital gains. As mentioned in the business example above, there could be major implications if the value drops before you sell as you’ll still owe tax on the higher amount and due to limitations on capital losses.
If your mining or staking rises to the level of a business, you may also be subject to self-employment tax. On the positive side, business operators can deduct related expenses such as electricity, equipment depreciation, hosting fees, etc.
Finally, some of you may have been aware of a court case challenging the taxable treatment of staking rewards. In the court case Jarret v. United States the taxpayer claimed that staking rewards should be treated as capital gains as it was newly created property (similar to crops). Ultimately the case was dismissed and a verdict was not reached. The IRS will still treat staking as ordinary income in the meantime.
4. New Form 1099-DA
Even though taxpayers are legally required to report all digital asset transactions, many have not. The IRS is aware of this compliance gap and are implementing Form 1099-DA which will be used by exchanges to directly report digital asset sales to the IRS. All digital asset brokers will be subject to this filing requirement and will send this form to it’s users. Cryptocurrency, stablecoins, NFTs and other forms of digital assets will now be reported on this form. The form is expected to go into effect this tax year 2025 (issued to taxpayers in early 2026).
Compliant crypto taxpayers in the past have used crypto-tracking software that integrate with their wallet/brokerage account in order to track their transactions. Even with the implementation of Form 1099-DA, I still recommend people use this software. For this tax year 2025, issuers of Form 1099-DA are not required to report the cost basis. Even brokers of other assets (like stocks and bonds) don’t always report the cost basis of each asset. There is also bound to be errors when implementing regulations of this scale so you should highly consider downloading this software if you have significant crypto transactions.
Final Thoughts
The tax rules for cryptocurrency are evolving, but one theme remains constant: the IRS expects full reporting and compliance even though the rules can be obtrusive or nearly impossible to uphold. Hopefully Congress will gain a better understanding of cryptocurrency and create laws more feasible for users to follow. As always, we will be on the look out for any guidance regarding this topic.
Sources:
https://www.irs.gov/filing/digital-assets
https://law.justia.com/cases/federal/appellate-courts/ca6/22-6023/22-6023-2023-08-18.html