09/29/2025
It’s one of the biggest—and potentially most expensive—myths in the world of digital assets. You trade some Bitcoin for Ethereum. You use a stablecoin to buy an NFT. It all stays on the blockchain, never hitting your bank account, so it’s not a taxable event, right?
Wrong. And that misconception could land you in hot water with the IRS.
As tax professionals, we see business owners and savvy investors dive into cryptocurrency with incredible strategic foresight, only to treat the tax implications as an afterthought. This is like building a high-performance race car but forgetting to install brakes. It’s only a matter of time before you hit a wall.
The foundational concept you must understand is this: The IRS does not view cryptocurrency as currency. According to longstanding official guidance, the IRS treats virtual currency as property.
Think of your crypto holdings like shares of stock, a piece of investment real estate, or a valuable piece of art. When you dispose of that property, you trigger a taxable event.
This is where many investors get tripped up. A taxable event isn’t just selling your crypto for U.S. dollars. The net is cast much, much wider.
Here are the most common transactions that require you to calculate a capital gain or loss:
It’s critical to understand that just because cash didn't touch your hands doesn’t mean you don't have a U.S. dollar-denominated tax liability.
Your crypto activities can generate two different types of taxable income, each with its own set of rules.
This applies when you dispose of crypto you held as an investment (your capital asset). The calculation is simple in theory, but often messy in practice:
Just like with stocks, the holding period matters immensely:
Properly tracking your holding periods can translate into thousands of dollars in tax savings.
Sometimes, you don’t buy crypto—you earn it. In these cases, the crypto is taxed as ordinary income upon receipt. The amount of income is the fair market value of the coins when you gain control over them.
Common examples include:
Here’s a crucial second step: The crypto you received as ordinary income now has a cost basis equal to the amount you reported as income. When you later sell or trade that crypto, you’ll have a capital gain or loss based on how its value has changed since you received it.
If the IRS comes knocking, "I didn't know" or "my exchange didn't send me a form" won't be a valid defense. The burden of proof is on you, the taxpayer. Meticulous record-keeping isn't optional; it's your primary line of defense.
For every single transaction, you need to be able to prove:
Trying to reconstruct this information for hundreds or thousands of transactions at the end of the year is a recipe for disaster, inaccuracies, and a massive headache. Using crypto tax software that connects to your exchanges and wallets can be a lifesaver, but you still need to review its work for accuracy.
The digital asset space is constantly evolving, and the tax guidance often lags. However, general principles apply.
Navigating the world of crypto taxation is complex. The difference between a smart, tax-efficient strategy and a costly mistake often comes down to proactive planning. This isn't just about year-end reporting; it's about making informed decisions with every transaction.
Are you harvesting losses to offset gains? Are you holding appreciating assets for over a year to secure better tax rates? Is your business prepared to accept crypto payments and account for them correctly?
Don’t wait for a letter from the IRS to find out you’ve been doing it wrong. Take control of your crypto tax strategy today.
Sign up today for a FREE discovery call.
Greg Tobias, Enrolled Agent
Admitted to practice before the Internal Revenue Service
Sources:
Internal Revenue Service, Frequently Asked Questions on Virtual Currency Transactions