With the year-end fast approaching, it’s essential to ensure your tax situation is well-organized, particularly for those involved in cryptocurrency investments. A new IRS requirement for brokerage reporting is set to take effect for transactions occurring after January 1, 2025. The IRS typically classifies cryptocurrencies as property, akin to stocks or real estate, meaning that selling digital assets can result in capital gains or losses. While it has always been advisable for crypto investors to maintain accurate records, the introduction of this reporting requirement underscores the urgency for compliance. Brokerages will now be mandated to issue a Form 1099-DA, which will outline gross proceeds from each digital asset sale for the 2025 tax year. Starting in 2026, they will also need to include cost basis details for covered securities.
Historically, brokers have not been required to provide 1099 forms for crypto transactions, which has allowed some individuals to avoid proper reporting, according to Ric Edelman, a financial advisor and founder of the Digital Assets Council of Financial Professionals. “Many people have the false impression that they don’t need to report these transactions,” Edelman remarked. As investors prepare their tax strategies for a year marked by Bitcoin’s significant fluctuations—including a rise to unprecedented highs followed by a dramatic drop—understanding the new, stricter recordkeeping obligations is crucial.
For instance, if you purchased Ethereum for $1,500 and incurred a $50 transaction fee, your total cost basis would amount to $1,550, as illustrated by Coinbase. If you then sold that Ethereum for $2,000, your taxable gain would be calculated at $450 ($2,000 minus $1,550).
### Get Your Crypto Recordkeeping in Order Now
Starting from the 2026 tax year, brokers will be responsible for reporting cost basis information, making it imperative for investors to begin recording their transactions meticulously. “It is the taxpayer’s duty to track and verify the cost basis they report,” stated Daniel Hauffe, a senior manager for tax policy at The American Institute of Certified Public Accountants. This task may be particularly daunting for those who have moved their tokens between different platforms without maintaining detailed records. In such situations, brokers may only know the price at which the tokens were transferred rather than the purchase price, Hauffe explained.
To address these potential discrepancies, it’s advisable for taxpayers to resolve any recordkeeping issues now, ideally with the help of a qualified tax professional. Those who have not meticulously tracked their holdings may want to consider enlisting the services of specialized tax recordkeeping providers such as ProfitStance, Taxbit, TokenTax, or ZenLedger. Edelman emphasized the importance of using a dedicated recordkeeping service due to the intricacies involved, warning that attempting to manage this manually could lead to costly mistakes.
### Crypto Staking, and Staking ETFs, to Be a Major Tax Focus
Although the IRS issued fundamental guidelines regarding cryptocurrency taxation over a decade ago, the market dynamics have evolved considerably, highlighting the need for updated regulations. In 2024, the IRS indicated via Notice 2024-57 that it is continuing to evaluate different crypto transactions to establish suitable tax treatments. This has left many taxpayers uncertain about how to properly report various transactions. While the IRS has stated that it will not impose penalties for certain transactions during this transitional period, it remains critical for taxpayers to keep detailed records.
One area where clarity is particularly sought is in staking transactions. Edelman noted that more guidance on staking and other complex crypto transactions is expected next year. Some advocates argue that taxes should only be levied when these rewards are actually utilized or sold, while the IRS currently maintains that rewards should be treated as income upon receipt, according to Hauffe. The need for further guidance is amplified by the IRS’s recent confirmation that exchange-traded fund (ETF) issuers can offer staking rewards, as noted by Zach Pandl, head of research at Grayscale. This expansion of cryptocurrency availability through ETFs means that more investors may soon face tax implications due to staking rewards.
### Bitcoin’s Big Drop Could Be a Tax-Loss Advantage
For some cryptocurrency investors, the upcoming month presents a strategic opportunity for tax-loss harvesting, a tactic that involves selling assets at a loss to offset gains from other investments, according to Pandl. Bitcoin’s decline from its record high in October could enable investors to leverage tax benefits, depending on their purchasing price. Additionally, some may find advantages in tax-gain harvesting, which entails selling investments at a time when it will have the least tax impact. “Now is the time to consider these strategies and plan accordingly,” advised Stuart Alderoty, president of the National Cryptocurrency Association, which focuses on educating the public about cryptocurrency. “You can harvest both gains and losses.”
### Many Accountants Don’t Understand Digital Assets
Tax treatment largely depends on an individual’s tax bracket and whether the gains are categorized as short-term or long-term. If a digital asset has been held for over a year, profits may be subject to long-term capital gains rates of 0%, 15%, or 20%. Conversely, assets held for less than a year fall under standard tax rates ranging from 10% to 37%. The complexity of cryptocurrency taxation is further compounded by various factors, especially given the evolving IRS regulations. Reporting crypto transactions correctly is essential; for instance, if digital assets were sold, exchanged, or disposed of as capital assets, Form 8949 should be used. Income received in crypto as an employee or independent contractor should be reported on Form 1040.
Moreover, many crypto holders are often confused by federal income tax questions pertaining to digital assets. On the initial page of tax forms, individuals are asked if they received or disposed of any digital assets during the tax year. Some mistakenly interpret “received” to mean purchased, but Edelman clarified that it actually refers to assets received as payment for services, mining, staking, or through airdrops related to hard forks. Given the complexities surrounding cryptocurrency taxation, it is crucial for individuals to consult tax advisors who are well-versed in this area, as most accountants may lack the necessary training to navigate these issues effectively.
