When crypto first came to prominence more than 15 years agoOne of the coin’s big selling points was its lack of ties to any specific government. Unlike fiat currencycryptocurrency offered the possibility of a purely mathematical currency that had nothing to do with politics, governance or taxation.
While crypto still exists touted as an alternative to fiat moneylike the US dollar, the real world of politics, governance and taxation has found a way to infringe on the use of this alternative currency in America. Specifically, the IRS requires US taxpayers to report crypto income on their taxes. Because in this world nothing can be said to be certain except the death of idealistic perfection and taxes.
And since the IRS is involved, the process of reporting your crypto assets on your tax return can involve the kind of complexities that make you want to run out of money altogether and return to the barter system. That’s why we spoke to a personal finance expert Robert Farrington on how to handle tax returns if you own crypto assets.
Here’s what we learned.
How you received your crypto matters
There are several ways you can become a proud cryptocurrency owner:
- You may receive crypto as payment for goods or services
- You could mine it yourself
- You could buy it as an investment
Depending on how the crypto came into your possession could affect how you report it on your taxes, and Farrington explains that this can make your taxes complex.
Crypto as income
If you accept crypto as payment for goods or services, the currency is considered part of your income. In that case, “you treat the income as business income, regardless of currency. You must report it as the USD value at the time you received it,” says Farrington.
Suppose you received 0.25 Bitcoin as payment for your company’s services on August 31, 2025. Bitcoin was worth it $108,236.71 USD on that day, meaning you’ll have to report your 0.25 Bitcoin income as $27,059.18 even if you didn’t immediately convert the cryptocurrency into USD.
“When or if you convert the crypto to USD, you have a secondary transaction that may involve a capital gain or loss,” Farrington explains. (More on that below.)
It is also important to note that mining your own crypto is also considered income, which can be considered business income or hobby income. “If it’s mined as part of a business, you may also be able to deduct related business expenses, such as computer hardware, software or energy costs,” says Farrington.
Crypto as an investment
Cryptocurrency investing has become much more mainstream in recent years, and the tax rules for cryptocurrency investments are largely the same as the rules for other investments.
In particular, as with other types of investments, short- and long-term capital gains rules apply to cryptocurrency gains and losses. Any cryptocurrency you have held for less than a year is subject to short-term capital gain or loss rules, while any cryptocurrency you have held for more than a year is subject to long-term capital gain or loss rules.
Where it gets a bit confusing is how you experience capital gains or losses with crypto: through convert your crypto to USD.
“If you convert the crypto to fiat currency, such as USD, you typically pay capital gains tax on it,” says Farrington. That’s because you usually convert the crypto at a higher exchange rate than you bought it for.
For example, let’s say you invested in a crypto asset worth $20,000 USD and held it for three years, during which time it increased in value to $28,000 USD. If you convert the asset into USD, you would have a long-term capital gain of $8,000.
Don’t forget to take crypto shopping into account
Another confusing aspect of reporting crypto on your taxes is the fact that you may have a capital gain or loss if you pay for goods or services through cryptocurrency.
This is how it works: In every transaction if you use your cryptocurrency to make a payment, there will likely be a difference between the amount the crypto was worth when you received it and its current fair market value (FMV).
If the FMV has increased, that is a capital gain, which means you have to pay capital gains tax. If the FMV has fallen, that is a capital loss that you may be able to use to offset future profits or income.
The tax authorities are becoming increasingly aggressive
As with any new technology, cryptocurrency operated in a kind of lawless Wild West environment before regulatory and tax laws had a chance to catch up to the new state of affairs. With new reporting requirements for the 2026 tax filing season, the IRS is now catching up on crypto and becoming more aggressive.
“This year, for the 2025 tax year, centralized exchanges will be required to file returns Form 1099-DA with the IRS to report digital asset sales,” says Farrington. Theoretically, the government has always required taxpayers to report their digital asset sales on their taxes in previous years, but without the requirement that crypto exchanges file these 1099-DA forms, the IRS has been more reliant on self-reporting.
This is why Farrington says it is essential that you ensure your crypto transactions are accurately reported on your tax return, otherwise it could trigger an audit. Careful crypto accounting is a must, and Farrington suggests taking the time to ensure your transactions are accurately categorized on the exchange so that incorrect 1099s are not filed.
“For example, if you’re transferring tokens between exchanges, you might want to make sure it’s categorized as a transfer so that the exchange doesn’t accidentally report it as a gain,” Farrington advises. A little extra preparation, documentation, and double-checking can bring important peace of mind to your tax season.
Virtual currency, real taxes
Cryptocurrency may not contain portraits of Washington, Lincoln, Hamilton or Jackson, but that won’t keep Uncle Sam’s sticky fingers out of your virtual wallet. US taxpayers must report their crypto income, investments, profits and transactions on their tax returns. And for the first time in 2026, crypto exchanges are now required to file 1099-DA forms to report digital asset sales.
Keeping track of your crypto assets can help you tame the tax reporting beast, but Farrington emphasizes that “if you are unfamiliar with these concepts to begin with, you should definitely seek advice from a tax professional.”
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