IRS Virtual Currency Tax FAQ: Forms, Wash Sales, and Penalties

The IRS crypto tax rules treat every cryptocurrency and digital token as property, not currency, which means almost any time you sell, swap, spend, or earn digital assets you create a taxable event. Gains and losses work the way they do for stocks or real estate, income received in crypto is taxed at its dollar value on the day you receive it, and starting with the 2025 tax year your broker reports your sales to the IRS on a new form. The rules are laid out across IRS Notice 2014-21, several revenue rulings, and a growing set of FAQs.¹

What Counts as a Taxable Event

Selling digital assets for dollars is the clearest case. Your capital gain or loss is the difference between what you received and your cost basis.² Trading one cryptocurrency for another works the same way, because the IRS treats the disposal of the first coin as a sale even though no dollars change hands. Spending crypto on goods or services follows the same logic: you are disposing of property, and the fair market value of what you bought sets your proceeds.

Getting paid in crypto is taxable as ordinary income at the fair market value on the date you receive it.¹ Employees see it on a W-2; independent contractors report it on Schedule C. Federal rates on that ordinary income run from 10% to 37%.³

Mining rewards and staking rewards are also ordinary income, measured at fair market value at the moment you gain dominion and control. Revenue Ruling 2023-14 spells this out for staking: cash-method taxpayers include the value of validation rewards in gross income for the year they can sell or transfer them.⁴ If mining or staking amounts to a trade or business, net earnings above $400 also carry a 15.3% self-employment tax, but business treatment lets you deduct hardware, electricity, internet, and software costs. Hobbyists cannot deduct those expenses under current law.

Hard forks and airdrops are covered by Revenue Ruling 2019-24. New tokens from a chain split are taxable as ordinary income once you have dominion and control over them. If they drop into a wallet you control and can sell right away, the income is recognized then. If they land on an exchange that doesn’t yet support the new token, you don’t owe anything until you can actually access and dispose of them.⁵

What Is Not Taxable

Several routine activities create no tax bill, and the IRS says you can check “No” on the digital asset question on Form 1040 if these are the only things you did:⁶

Buying crypto with U.S. dollars. This just establishes your cost basis.
Moving crypto between wallets or accounts you own, as long as you don’t pay the network fee in digital assets (that fee payment could itself be a taxable disposal).⁷
Holding without selling, exchanging, or otherwise disposing of the asset.
Making a gift. For 2026 the annual gift tax exclusion is $19,000 per recipient. Larger gifts require a return but typically don’t produce tax owed until you exceed the lifetime exemption.

Donating appreciated crypto to a qualified charity can also help. If you have held the asset more than a year, you can generally deduct its full fair market value without recognizing the built-in gain. Donations valued above $5,000 require a qualified appraisal and Form 8283.⁶

Cost Basis, Holding Period, and Rates

Your cost basis is what you paid in U.S. dollars, including fees or commissions.⁸ Sale proceeds minus basis is your gain or loss. Holding period controls the rate. One year or less means short-term, taxed at ordinary income rates.² More than a year qualifies for long-term rates of 0%, 15%, or 20%. For 2026, single filers pay 0% on long-term gains up to $49,450 of taxable income, 15% up to $545,500, and 20% above that. For married joint filers, the 15% bracket starts at $98,900 and the 20% bracket at $613,700.

Picking Which Coins You Sold

When you have bought the same coin at different prices, the default rule is FIFO: your oldest coins go first.⁸ Specific identification lets you choose which lot you are disposing of, which can help you pick higher-cost lots to shrink a gain.

Beginning with the 2025 tax year, specific identification requires you to select the lot before executing the trade, not at tax time. Your records must show the date and time of each acquisition, cost basis per unit, date and time of each sale, quantity sold, and the wallet or account identifiers involved. Without that documentation, you fall back to FIFO. Labels like “highest-in, first-out” are not separate IRS-approved methods; they only work as lot-selection strategies inside a properly documented specific ID framework.

Losses and the Wash Sale Gap

If your capital losses exceed your capital gains for the year, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if married filing separately), and any remainder carries forward indefinitely.⁹

Crypto still holds one meaningful edge over stocks. The wash sale rule under IRC Section 1091 blocks a stock investor from claiming a loss when they repurchase the same security within 30 days. As of 2026, that rule reaches only stocks and securities. Because the IRS classifies crypto as property, you can sell Bitcoin at a loss and buy it back the same day and still claim the loss. Several bills have been introduced to close this gap; none have passed. One boundary worth noting: if you hold crypto exposure through an ETF, that ETF is a security, so a loss sale followed by a repurchase inside 30 days is disallowed under the normal wash sale rule.

Forms You File

Every Form 1040 asks a yes-or-no question about digital assets: whether you received them as a reward, award, or payment, or sold, exchanged, or otherwise disposed of one during the year.¹⁰ “No” is only correct if you did nothing beyond buying with dollars, transferring between your own wallets, or holding.⁶

Beyond that checkbox, the forms that come into play depend on what you did:

Form 8949 lists each sale or exchange of a digital asset, with dates, proceeds, basis, and gain or loss for every transaction.¹¹
Schedule D totals the entries from Form 8949 and computes your overall capital gain or loss.¹²
Schedule C reports crypto income from self-employment such as freelancing, mining as a business, or running a validator node, along with related expense deductions.
Schedule 1 captures other income that isn’t wages or self-employment, such as airdrops or hard fork proceeds.

Form 1099-DA and Broker Reporting

The IRS created Form 1099-DA to bring digital asset reporting in line with traditional brokerage reporting. For the 2025 tax year, brokers that facilitated digital asset sales must send taxpayers a copy by February 17, 2026.¹³ It reports gross proceeds, similar to a 1099-B for stocks.

Final Treasury regulations expand who counts as a “broker” to include DeFi trading front-end service providers, but those rules apply only to sales occurring on or after January 1, 2027.¹⁴ Notice 2025-3 provides transitional relief from penalties and backup withholding while those platforms build compliance systems, and backup withholding obligations for DeFi brokers are postponed until January 1, 2028.

Not receiving a 1099-DA doesn’t excuse you from reporting. The form helps the IRS cross-check, but your filing obligation exists either way.

Foreign Exchanges

If you hold digital assets on a foreign exchange, the reporting picture is unsettled. FinCEN has said that foreign accounts holding only virtual currency are not currently reportable on the FBAR (FinCEN Form 114), because existing regulations don’t define a virtual currency account as a reportable type.¹⁵ FinCEN has also announced its intention to propose regulations adding virtual currency to that list, so the exemption may not last.

Separately, if your foreign financial assets (including digital assets held on foreign platforms) exceed $50,000 on the last day of the tax year or $75,000 at any point during the year, you may need to file Form 8938 under FATCA. Married joint filers hit those thresholds at $100,000 and $150,000. Form 8938 penalties start at $10,000 and can reach $50,000 for continued non-compliance.¹⁶

Penalties

Failing to report digital asset income or gains carries the same penalties as any unreported income. The accuracy-related penalty under IRC Section 6662 adds 20% to underpaid tax when the understatement comes from negligence or a substantial understatement.¹⁷ Civil fraud carries a 75% penalty. Criminal tax evasion can bring prosecution. Interest runs from the original due date on any unpaid amount.

The digital asset question on Form 1040 changes the calculus. Checking “No” when the answer should be “Yes” reads as a deliberate misstatement rather than an oversight, which raises the stakes from ordinary error to possible fraud.

Recordkeeping

The IRS requires records sufficient to support every position on your return, and crypto is no exception.⁶ For each transaction, keep the date and time, the type and quantity of the asset, its fair market value in U.S. dollars at the time, any transaction fees, and the wallet addresses or account identifiers on both sides.

This is where most active traders struggle. A single busy year can generate thousands of transactions across multiple wallets and exchanges, and reconstructing that history during an audit years later is painful and expensive. Export transaction data from every exchange and wallet regularly through the year rather than at filing time. Crypto tax software can pull data from multiple platforms and apply your chosen cost basis method automatically, though you are still responsible for checking the results. Professional preparation for returns with complex digital asset activity typically runs between $300 and $4,000, depending on transaction volume and the number of platforms involved.

1
Internal Revenue Service. IRS Notice 2014-21
2
Internal Revenue Service. Frequently Asked Questions on Digital Asset Transactions
3
Internal Revenue Service. Federal Income Tax Rates and Brackets
4
Internal Revenue Service. Revenue Ruling 2023-14
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Internal Revenue Service. Revenue Ruling 2019-24
6
Internal Revenue Service. Digital Assets
7
Taxpayer Advocate Service. Report Your Virtual Currency Transactions
8
Internal Revenue Service. Frequently Asked Questions on Virtual Currency Transactions
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Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses
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Internal Revenue Service. Determine How to Answer the Digital Asset Question
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Internal Revenue Service. Instructions for Form 8949 – Sales and Other Dispositions of Capital Assets
12
Internal Revenue Service. Form 8949 – Sales and Other Dispositions of Capital Assets
13
Internal Revenue Service. About Form 1099-DA, Digital Asset Proceeds From Broker Transactions
14
Federal Register. Gross Proceeds Reporting by Brokers That Regularly Provide Services Effectuating Digital Asset Sales
15
Financial Crimes Enforcement Network. Notice – Virtual Currency Reporting on the FBAR
16
Internal Revenue Service. Do I Need to File Form 8938, Statement of Specified Foreign Financial Assets
17
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments