Cryptocurrencies, Non-Fungible Tokens (NFTs), Digital, or Virtual Assets (we will call these, Crypto) have not
only revolutionized the financial landscape but have also introduced new challenges and considerations for
taxpayers. Erin understands and knows the constantly changing landscape of how crypto is created, awarded,
staked, exchanged, converted, sent, received, mined, held, spent, used, and taxed. She is seeking advice on
how to meet IRS rules. This week’s tip discusses crypto use, ownership, responsibilities, and obligations.
There are thousands of different cryptos in the world, so be sure to do your own research before becoming
involved in this type of activity.

Crypto is treated as property for tax purposes in the United States. This means transactions involving crypto
are subject to capital gains tax. Whether you’re buying, selling, exchanging, converting, staking, mining, or
using cryptocurrencies, each activity can trigger different tax consequences.

The primary tax consideration for crypto users is the calculation and reporting of capital gains and losses.
Capital gains arise when you sell or exchange a crypto at a higher value than its acquisition cost, while capital
losses occur when the selling price is lower than what you paid for the crypto.

It’s essential to keep meticulous records of all transactions, including dates, amounts, and corresponding
values in fiat (government-printed) currency. In the US it’s dollars, and in Japan it’s yen. Each country has a fiat
currency that is accepted and used.

Exchanges (where you transact crypto activity) are where you can get detailed records of your crypto
transactions, and there are hundreds of exchanges worldwide where you can conduct crypto transactions. The
biggest one used in the US is Coinbase. I would not use or consider an exchange that is not
headquartered (HQ) in the US! Using exchanges not HQ in the US is how so many people lost money in
crypto through theft or fraud.

The duration for which you hold a cryptocurrency can impact the tax rate applied to your capital gains. Short-
term capital gains, resulting from the sale of assets held for one year or less, are typically taxed at higher
ordinary income rates than long-term capital gains. Understanding and planning for the holding period can be
crucial in optimizing your tax position.

Tax authorities are increasingly focusing on crypto transactions, making accurate and transparent reporting
essential. The IRS requires taxpayers to report crypto transactions on their tax returns. All taxpayers must also
answer the digital asset question on their Form 1040 each year, regardless of whether they had any crypto
activity. Note that simply buying and holding crypto is not itself a taxable event, but selling, trading,
exchanging, or otherwise disposing of crypto generally is. Failure to comply with reporting obligations can lead
to civil and criminal penalties and legal consequences. Beginning with transactions on or after January 1, 2025,
exchanges are required to issue Form 1099-DA to investors, reporting gross proceeds from crypto sales to
both the investor and the IRS. Cost basis reporting by brokers phases in beginning January 1, 2026. These
forms will help you report your crypto transactions on your tax returns, but you should not rely solely on them –
many transactions may not be fully captured, so maintaining your own complete records remains essential.

Mining cryptocurrencies involves the verification of transactions on the blockchain. This means you are
solving complex puzzles online, and miners are rewarded with newly created or minted crypto. The value of
this crypto, at the time of receipt, is considered taxable income. Miners must report this income and may also
be eligible for certain deductions related to mining expenses.

Staking Rewards is another way to make money in crypto. This is another word for interest earned while
keeping your crypto restricted on an exchange. The longer you keep your crypto on an exchange, the more
staking rewards you earn. Each exchange determines how much interest or rewards you earn on a particular
crypto coin, token, or currency. Caution: some exchanges offer high rewards to get you there — but be sure
you can trust the exchange! While you stake a crypto, you cannot sell, remove, exchange, trade, or send it
anywhere, until you unstake the crypto first. And once you do that, you no longer earn rewards or interest.

Given the dynamic nature of crypto markets, tax planning becomes crucial.

1. Strategies such as tax-loss harvesting (selling losing crypto at year-end, then buying it back — as of the
current tax year, the wash sale rules that apply to stocks do not apply to crypto, so this strategy
remains available)

2. Holding assets for the optimal duration to qualify for long-term capital gains rates (this means holding
crypto for at least one (1) year before selling, trading, or exchanging it)

3. Exploring tax-efficient investment structures (LLCs, Partnerships, Corporations, or Trusts) can help
individuals and businesses manage their tax liabilities more effectively.

As the cryptocurrency ecosystem continues to evolve, so too will the regulatory landscape and tax
considerations. Staying informed, seeking professional advice, and diligently fulfilling reporting obligations are
key elements for individuals and businesses looking to navigate the tax impact of cryptocurrency successfully.
In an era where digital assets play an increasingly prominent role, understanding and addressing the tax
implications is essential for financial well-being and compliance with regulatory requirements.

Here are some points to remember:

• Crypto is property and taxed as Capital Gains (either short-term or long-term).
• All Digital or Virtual Assets (Crypto) are now required to be reported on Federal Tax Returns. Beginning
  with 2025 transactions, exchanges will issue Form 1099-DA reporting gross proceeds to investors and
  the IRS — similar to how brokerage firms send annual statements. Full cost basis reporting by brokers
  phases in starting in 2026.
• Be sure to work with a crypto specialist when reporting transactions on tax returns. Not all tax preparers
  know or understand crypto.
• Always do your own research before investing.
• Be sure to know where the exchange you use is located, licensed, and incorporated.
• Consider ALL tax options and strategies to maximize your crypto investments.

Call today, don’t delay! See how this affects you. We can be reached at 602-264-9331 and on all social media under azmoneyguy.

Related Blog Posts