Bitcoin and other cryptocurrencies started out as simple virtual coins and expanded into investing in crypto futures. However, these virtual currencies are not exempt from tax liability.
U.S. cryptocurrency tax regulations are constantly changing in response to the cryptocurrency market, and new rules may be proposed by the IRS.
In this 2025 Cryptocurrency Tax Guide for US Residents, we have put together the latest information on filing tax returns for cryptocurrency assets.
What is cryptocurrency?
Started as a digital currency in 2009, Bitcoinor cryptocurrency An alternative payment method that generally uses cryptographic algorithms. Within a few years of its establishment, cryptocurrencies became a popular alternative to online payments and remain popular to this day.
Are virtual currencies taxed by the government?
In the United States, Internal Revenue Service (IRS) considers cryptocurrency Not as a currency, but as a digital asset (an asset that can be bought, owned, sold, and transferred electronically).
This means that cryptocurrencies are considered and taxed like stocks and real estate. Each time you sell or trade them, a capital gain or loss event is triggered. These taxable events are reported on Form 8949 and summarized on Schedule D, Form 1040 of your federal income tax return.
But what does this crypto tax classification mean for the average investor?
Crypto tax changes in 2025
2025 started with some major updates to the crypto tax filing process.
- Effective January 1, 2025, digital asset brokers will be required to issue a new tax Form 1099-DA to report gross proceeds from the sale or exchange of digital assets through their brokers.
- Effective January 1, 2026, brokers will be required to include a cost basis for virtual currency purchases made through their platforms after January 1, 2026. This must be added to Form 1099-DA.
How are virtual currencies taxed in the US?
According to IRS rules, these are considered assets and are subject to either income tax or capital gains tax.
The amount of tax that each individual has to pay on their crypto portfolio depends on the income earned over these coins, the specific transactions, and the holding period of the asset.
Transactions involving short-term capital gains or income earned through virtual currencies are subject to up to 37% tax. For long-term capital gains, cryptocurrencies are subject to taxes ranging from 0% to 20%. NFTs that are considered collectibles are subject to a 28% tax in most cases.
Virtual currency under capital gains tax
Whenever you dispose of cryptocurrencies through activities such as exchanging cryptocurrencies for fiat currencies, exchanging cryptocurrencies for things like stablecoins or tokens, or purchasing goods or services with cryptocurrencies, you will be required to pay capital gains tax on the gains from these transactions.
There is no fixed tax rate, and you will pay taxes based on the income earned through cryptocurrencies and the holding period of the assets. If held for less than one year, you pay short-term capital gains tax rates; if held for more than one year, you pay long-term capital gains tax rates.
How to calculate virtual currency capital gain
Selling, trading, or using cryptocurrencies for profit results in capital gains, and losses result in capital losses. You can calculate your profit or loss by determining your cost basis (coin cost at the time of purchase plus any associated fees).
If you receive cryptocurrency as a gift, we will use the market price in USD on the date you received it. The capital gain or loss is then calculated by subtracting the cost basis from the sales price. You will pay capital gains tax on this basis.
You don’t have to pay taxes if you incur a loss. However, you can reduce taxes on your profits using a strategy called “tax loss harvesting.” Tax loss recovery is a way to offset long-term losses with long-term gains, similarly reducing taxes in the short term.
Income tax on virtual currency
In some cases, cryptocurrency trading is considered a source of income and is subject to income tax. Activities that are considered to earn cryptocurrency include receiving payment for services or products in cryptocurrency, airdrops, staking and mining rewards, DeFi interest, and receiving referral bonuses.
However, the rules for considering cryptocurrencies as income rather than capital gains are not detailed by the IRS, so we recommend consulting with a cryptocurrency tax advisor before filing your return.
How to calculate income earned through cryptocurrencies
Calculating taxes on cryptocurrencies as income is the same as calculating regular income taxes. If you calculate the market value of your virtual currency in US dollars on the day you earn it, that is your virtual currency income. You will pay taxes on this amount at your federal and state income tax rates.
Taxes on lost or stolen cryptocurrencies
The IRS recently released guidelines for what will be considered theft or loss in March 2025. This may exempt you from paying taxes on the lost amount. This detail is contained in post-TCJA section 165(c)(2).
Account fraud where account funds are transferred under the guise of protecting the account, investment fraud with the goal of making a profit, phishing scams that involve unauthorized access to the account, and losses related to federally declared disasters are some of the scenarios that may qualify for tax deductions.
The decentralized nature of the blockchain ecosystem makes it difficult or even impossible to recover lost or stolen cryptocurrencies, and no government agency can provide assistance in recovering lost coins.
If this happens, you can report the fraud to the FBI. Internet Crime Complaint Center (ICCC) and record details related to the scam, such as wallet address and username.
Forms that require you to include virtual currency on your tax return
Several additional forms allow you to file cryptocurrency taxes along with your annual tax return. The main forms required to complete the submission process are:
- Form Schedule D 1040 and Form 8949 for reporting virtual currency dispositions, capital gains, and losses.
- Form Schedule 1 1040 or Form Schedule (c) 1040 to report income earned from cryptocurrency.
- Form 1099-DA for reporting transactions during fiscal year 2025 (effective starting in 2026).
- Form 1099-K is issued by cryptocurrency exchanges to investors whose trading volume exceeds a threshold and is used to summarize annual payments.
- Form 1099-B. Provided by brokers to report virtual currency sales.
Virtual currency tax calculation for filing
- Lists all cryptocurrency transactions for the year.
- Determine which cryptocurrency activities are taxable and the type of tax (income or capital gains) that applies to each activity.
- Calculate profits, losses, and income from your activities.
- File your taxes using paper forms, a tax filing app, or with the help of an accountant.
Taxable and Tax-Free Crypto Events
Taxable event
- Sell Cryptocurrency for Fiat
- Exchange one cipher for another
- Purchasing goods and services using cryptocurrencies
- Cryptocurrency as payment for services provided
- Earn mining and staking rewards
- airdrop and hard fork
- Convert cryptocurrency to stablecoin
tax exempt event
- Transfer cryptocurrencies between your wallets
- Hold digital assets without selling them (HODLing)
- Cryptocurrency gift
- Donate cryptocurrencies to eligible charities
- Use digital assets as collateral
- Buy cryptocurrencies with fiat currency
Are NFTs taxable?
Digital ownership of non-fungible tokens or unique items such as digital art may be subject to tax. If you buy or sell NFTs for profit, you may be required to pay short-term or long-term capital gains depending on how long you hold them.
If you create and sell NFTs, you will have to pay regular income taxes. If NFT creation is your primary source of income, you may also have to pay self-employment income tax.
If you receive royalties from secondary sales of NFTs, you will need to file a regular income tax return. When NFTs are exchanged for other goods or services, the market value of the NFTs at the time of the transaction becomes ordinary income.
Are taxes applicable to cryptocurrency miners?
Cryptocurrency miners are taxed by the IRS at the fair market value of their coins at the time they receive them, which is considered ordinary income. If the miner continues to own the coins after mining, they will be required to pay capital gains tax based on the fair market value at the time of receipt.
If a miner operates all of its mining activities as a bona fide business, the IRS will allow it to deduct business expenses from the income it receives from mining. However, self-employment tax of 15.3% applies in such cases.
Tips to reduce cryptocurrency taxes
Failure to declare virtual currency is considered a crime. However, there are things you can do to minimize your crypto tax liability.
- Long-term capital gains tax rates are lower than short-term capital gains tax rates, so holding crypto coins for a long time will reduce your tax rate.
- By selling poorly performing cryptocurrencies at a loss, you may be able to balance your capital gains with up to $3,000 in ordinary income taxes.
- Gift cryptocurrencies to your loved ones for a tax-free wealth transfer. This only applies if the value of the cryptocurrency you gift is below the annual or lifetime gift limit.
- Donating cryptocurrencies to charity may allow you to deduct the fair market value of long-term assets without incurring capital gains taxes.
- Holding your crypto assets using a tax-advantaged account, such as a self-directed IRA, may provide some tax deferral.
- Choosing the appropriate cost basis calculation method, such as FIFO, HIFO, or specific identification, can help minimize tax rates.
Talk to your financial advisor about the strategy that best suits your financial goals.
Cryptocurrency Tax Guide: Conclusion
Filing a virtual currency return in 2025 may seem a little daunting due to the complicated procedures that follow. However, many crypto exchanges and tax consultants are offering support, and the IRS has set clear guidelines with improved reporting tools and better access to information compared to previous years.
Form 1099-DA changes IRS policy regarding DeFi and digital asset brokers. Investors are encouraged to treat cryptocurrency activities like traditional investments and earn profits on time. You can simplify the tax filing process by conducting a proper risk audit and keeping thorough records to avoid penalties.
Taking a strategic approach to tax filing not only protects your virtual investments, but also creates opportunities for smarter, long-term investment planning.
