With the end of the year approaching, now is a critical time for investors to ensure their tax affairs are properly organized. This is particularly crucial for those involved in cryptocurrency, due to a new IRS reporting requirement that will take effect for transactions conducted after January 1, 2025. The IRS generally categorizes cryptocurrencies as property, similar to stocks and real estate, meaning that selling crypto can result in capital gains or losses. While investors should have maintained thorough records throughout the year, the new requirements underscore the importance of this practice. Brokerages will soon be obligated to issue what is known as a Form 1099-DA, which for the 2025 tax year will require them to report gross proceeds from each digital asset sale they facilitate. Starting in 2026, brokers must also include cost basis information for covered securities.
Previously, brokers were not required to provide 1099 forms for cryptocurrency transactions, which made it easier for some individuals to evade taxes, according to Ric Edelman, a financial advisor and founder of the Digital Assets Council of Financial Professionals. “Many people incorrectly assume there are no reporting requirements,” Edelman noted. As cryptocurrency investors prepare their tax strategies in light of a year marked by Bitcoin’s significant fluctuations—climbing to new highs and then experiencing a sharp selloff of over $40,000—it is essential to grasp the new, more rigorous recordkeeping mandates.
Understanding Your Cost Basis
For instance, if you purchased Ethereum for $1,500 and incurred a $50 transaction fee, your cost basis would total $1,550, as illustrated by Coinbase. “In essence, your gain or loss is calculated by subtracting the cost basis from the gross proceeds. If you later sold that 1 ETH for $2,000, your taxable gain would be $450 ($2,000 – $1,550).”
Time to Organize Your Crypto Records
Starting in tax year 2026, brokers must report cost basis information, emphasizing the need for individuals to maintain accurate records. “It is the taxpayer’s obligation to track and verify any cost basis they provide,” stated Daniel Hauffe, senior manager for tax policy and advocacy at the American Institute of Certified Public Accountants. For many cryptocurrency holders, especially those who have transferred tokens between different platforms, this could pose a challenge, as brokers may only know the price at the time of transfer rather than the original purchase price.
To avoid complications when brokers begin reporting cost basis, taxpayers should address these issues sooner rather than later, potentially consulting with a qualified tax professional. Investors who have kept inadequate records might also benefit from engaging a specialized crypto recordkeeping service. Options like ProfitStance, Taxbit, TokenTax, and ZenLedger are available to assist in this regard. Edelman emphasizes the utility of such services due to the complexities involved, remarking that attempting to manage this manually could lead to numerous errors.
Tax Implications of Crypto Staking and ETFs
Although the IRS provided foundational guidance on cryptocurrency taxation over a decade ago, the landscape has evolved significantly, highlighting the necessity for updated regulations in various areas. In its Notice 2024-57, the IRS announced it was still evaluating different types of crypto transactions to determine appropriate tax treatments. This has left many taxpayers uncertain about how to report certain transactions. While the IRS has indicated that it will not impose penalties for specific transactions while regulations are being finalized, it is imperative for taxpayers to keep meticulous records to ensure proper accounting.
One area that remains unclear is the taxation of staking transactions. Investors are expecting clearer guidance on this and other complex transactions in the upcoming year. Some advocates argue that taxes should only be applied when staking rewards are spent or sold, yet the IRS currently classifies these rewards as income at the time they are received, according to Hauffe. Additional clarity on staking is particularly relevant now that the IRS has confirmed that exchange-traded fund (ETF) issuers can provide staking rewards, as noted by Zach Pandl, head of research at Grayscale. The inclusion of cryptocurrencies in ETFs has broadened access for everyday investors, and the latest guidance suggests that an increasing number of investors may encounter tax implications from staking rewards. “Staking rewards are becoming more prevalent for investors, especially with their introduction in ETFs,” Pandl remarked.
Potential Tax-Loss Harvesting Opportunities
For some crypto investors, the upcoming month may present an opportunity for tax-loss harvesting—a strategy that involves selling assets at a loss to offset gains in other investments. Given Bitcoin’s recent decline from its record highs in October, investors may find advantageous tax outcomes based on their acquisition costs. There is also the potential for tax-gain harvesting, where an investment is sold to minimize tax liabilities. “Now is the time to consider and plan for these strategies,” advised Stuart Alderoty, president of the National Cryptocurrency Association, which focuses on crypto education. “Investors can harvest both gains and losses accordingly.”
The Challenge of Taxation Understanding Among Accountants
Tax obligations generally hinge on the individual’s tax bracket and whether their gains are short-term or long-term. For example, if an investor holds a cryptocurrency for over a year, profits are subject to long-term capital gains rates of 0%, 15%, or 20%. Conversely, assets held for less than a year face ordinary income tax rates ranging from 10% to 37%.
The unique and intricate nature of cryptocurrency complicates tax determinations, especially amid changing IRS regulations. It’s crucial to ensure transactions are reported correctly on the appropriate forms. For instance, if you sold or exchanged a digital asset categorized as a capital asset, you should utilize Form 8949. If you received digital assets as compensation—whether as an employee or independent contractor—report this income on Form 1040, U.S. Individual Income Tax Return. Moreover, many crypto holders are perplexed by the federal income tax inquiries related to digital assets. Near the top of the first page, taxpayers must indicate whether they received, sold, exchanged, or disposed of any digital assets during the tax year. Many mistakenly interpret “received” as synonymous with purchase, but Edelman clarified that it refers to assets acquired as payment for services or property, rewards, mining, staking, and similar activities, or through airdrops associated with a hard fork.
Given the complexities surrounding crypto taxation, it is vital to consult with a tax advisor well-versed in digital assets. “Most accountants lack the necessary training in this area,” Edelman concluded.
