How to Report Crypto on Your Taxes: Step-by-Step Guide

Why the IRS Knows About Your Crypto in 2026

Consider this scenario: Jennifer bought $5,000 of Ethereum in 2023 and sold it for $18,000 in early 2025, earning a $13,000 gain. She thought she could wait and see if anyone noticed. In February 2026, she received a Form 1099-DA from Coinbase reporting $18,000 in gross proceeds — and so did the IRS.

Starting with transactions in 2025, domestic crypto exchanges are required under the Infrastructure Investment and Jobs Act of 2021 to issue Form 1099-DA to both taxpayers and the IRS. This form reports gross proceeds from digital asset transactions, the same way a stock broker issues a Form 1099-B. According to the Tax Adviser (March 2026), brokers must furnish Form 1099-DA to customers by February 17, 2026 for the 2025 tax year.

Cost basis reporting — which tells the IRS your purchase price, not just your selling price — becomes mandatory for transactions occurring on or after January 1, 2026. For 2025 transactions, the IRS receives proceeds only. This gap matters: if your 1099-DA shows $18,000 in proceeds and you do not file Form 8949 explaining that your cost basis was $5,000 and your gain was $13,000, the IRS may assess tax on the full $18,000.

Despite this, a 2023 study by Divly found that only 0.53% of cryptocurrency investors globally reported crypto taxes — with the U.S. rate slightly higher but still dramatically undercompliant. The IRS is closing that gap fast. Use our full 2026 crypto tax guide for a broader overview of all crypto tax strategies.

Step 1: Identify Every Taxable Event

Before you can fill out any form, you need a complete transaction history. The IRS asks every taxpayer, on Form 1040 itself, whether they received, sold, exchanged, or otherwise disposed of any digital assets during the year. This is a checkbox question — answering "No" when you had transactions is a false statement under penalty of perjury.

Not every crypto activity is taxable. Here is the definitive breakdown:

Step 2: Gather Your Transaction Records

For each taxable transaction you need four pieces of data:

1. Description of the asset — e.g., "0.5 Bitcoin" or "100 Ethereum"
2. Date acquired — the exact date you bought or received the asset (determines holding period)
3. Date sold or exchanged — the exact transaction date
4. Cost basis — what you paid for it, including exchange fees
5. Proceeds — what you received, including the fair market value of any crypto received in a trade

Download your complete transaction history from every exchange you used. Most major exchanges (Coinbase, Kraken, Gemini, Binance.US) provide CSV exports with all required fields. For self-custody wallets, you will need to export your transaction history from a block explorer and match it to fair market value data for each date. Crypto tax software like Koinly, CoinLedger, or TaxBit can automate much of this aggregation.

Critical for 2026: If you received a Form 1099-DA, compare it carefully to your records. For the 2025 tax year, brokers report gross proceeds only — your 1099-DA will not include your purchase price. You must provide your own cost basis on Form 8949. If the exchange's proceeds figure is wrong (e.g., they included a transfer as a sale), you can correct it on Form 8949 with an explanation in column (g).

Step 3: Choose a Cost Basis Method

When you have purchased the same cryptocurrency at different prices at different times, you must choose how to match which coins you are selling to which purchase lots. The IRS allows the following methods for crypto:

• FIFO (First In, First Out): Sells your oldest coins first. This is the IRS default if you do not elect another method. In a rising market, FIFO produces the largest gains and highest tax bill because your oldest coins typically have the lowest cost basis.
• LIFO (Last In, First Out): Sells your most recently purchased coins first. Can produce smaller gains in a rising market, but is less commonly supported by exchanges.
• HIFO (Highest In, First Out): Sells the coins with the highest cost basis first, minimizing your recognized gain. Generally the most tax-efficient method in a rising market. Requires meticulous record-keeping to support specific lot identification.
• Specific Identification: You specifically identify which lots you are selling. This gives maximum flexibility and is how HIFO is implemented in practice. Per IRS Rev. Proc. 2024-28, you must document your lot selection contemporaneously.

Example — FIFO vs HIFO: You hold 1 Bitcoin purchased as follows: 0.5 BTC at $20,000 (January 2023), 0.5 BTC at $60,000 (November 2024). You sell 0.5 BTC today at $90,000.

• FIFO result: Proceeds $45,000 − Basis $10,000 = $35,000 long-term gain (held since Jan 2023)
• HIFO result: Proceeds $45,000 − Basis $30,000 = $15,000 short-term gain (held since Nov 2024)

In this case FIFO produces a lower tax rate (long-term) but higher gain. HIFO produces a higher rate (short-term) but lower gain. The optimal choice depends on your tax bracket. Use our Capital Gains Tax Calculator to model both scenarios for your income level.

Step 4: Complete Form 8949

Form 8949 (Sales and Other Dispositions of Capital Assets) is where every individual crypto transaction is reported. It has two parts: Part I for short-term transactions (held one year or less) and Part II for long-term transactions (held more than one year).

New for 2026: Crypto transactions now use separate checkboxes from stock transactions. For crypto proceeds reported on Form 1099-DA:

• Box G (Part I) — Short-term: proceeds reported by broker, basis reported by broker
• Box H (Part I) — Short-term: proceeds reported by broker, basis NOT reported by broker (most common for 2025 transactions)
• Box I (Part I) — Short-term: proceeds NOT reported to IRS (self-custody, offshore exchanges)
• Box J/K/L (Part II) — Same categories for long-term transactions

For each transaction, fill in columns A through H:

1. (a) Description: "1.0 ETH" or "Bitcoin"
2. (b) Date acquired: MM/DD/YYYY of purchase
3. (c) Date sold: MM/DD/YYYY of sale
4. (d) Proceeds: Amount received in USD
5. (e) Cost basis: What you paid, including fees
6. (f) Adjustment code: "B" if you are adjusting a 1099-DA figure
7. (g) Adjustment amount: The adjustment amount (positive or negative)
8. (h) Gain or Loss: (d) + (g) − (e)

If you have more than a dozen transactions, practically every crypto tax software produces a Form 8949 PDF you can attach directly to your return. The IRS explicitly allows attaching a substitute statement in the Form 8949 format rather than listing each transaction on the form itself, provided you include all required data fields.

Step 5: Transfer Totals to Schedule D

Schedule D (Capital Gains and Losses) aggregates all your Form 8949 totals plus any other capital gains or losses. You transfer:

• Part I total (short-term net) → Schedule D, Line 1b, 2, or 3 depending on your box
• Part II total (long-term net) → Schedule D, Line 8b, 9, or 10

Schedule D then computes your net capital gain or loss for the year, which flows to Form 1040, Line 7. The tax calculation on long-term gains uses the Qualified Dividends and Capital Gain Tax Worksheet (in the Form 1040 instructions), which applies the 0%, 15%, or 20% preferential rates rather than the ordinary income brackets.

If your total capital losses exceed your total capital gains, you can deduct up to $3,000 of net capital loss against ordinary income. Any excess loss carries forward to future years — valuable if you had a bad year in crypto. See our guide on capital gains tax rates for the full rate table and NIIT surtax thresholds.

Step 6: Report Crypto Income (Mining, Staking, Airdrops)

Crypto income — meaning crypto you received as compensation rather than purchasing — is taxed as ordinary income in the year you receive it, at the fair market value on the date of receipt. This income is reported separately from your capital gains.

Mining income: If you mine crypto as a business (regular activity for profit), report on Schedule C. You owe both income tax and self-employment tax (15.3% on net earnings). Business miners can deduct equipment, electricity, and other mining expenses on Schedule C. Hobby miners report income on Schedule 1, Line 8z but cannot deduct expenses under the TCJA.

Staking rewards: Per the IRS's 2023 ruling in Jarrett v. United States, staking rewards are income when received, taxed at fair market value on the receipt date. Report on Schedule 1, Line 8z. Your cost basis in staking rewards equals the fair market value you reported as income — so if you later sell the staking rewards, you only pay capital gains on any appreciation above that amount.

Airdrops: An airdrop is taxable ordinary income upon receipt, per IRS Rev. Rul. 2023-14. Report the fair market value of coins received on Schedule 1. If the airdrop was unsolicited and you had no ability to accept or reject it, some tax professionals argue it is not taxable until you exercise "dominion and control" — but the IRS's current position is that receipt triggers income.

Short-Term vs Long-Term Rates: The Difference Can Be Enormous

The decision to hold or sell crypto for more than one year is one of the highest-leverage tax planning decisions available to crypto investors. The rate differential can be substantial:

Note that unlike stocks, crypto is not subject to the wash sale rule under current law (though proposed legislation could change this). This means you can sell crypto at a loss to harvest the tax benefit and immediately repurchase the same asset — a strategy not available with stocks due to the 30-day wash sale window. According to NerdWallet's 2025 crypto tax guide, tax-loss harvesting is one of the most widely used crypto tax reduction strategies.

Worked Example: Reporting a Crypto Trade

Situation: Marcus bought 2 ETH on March 15, 2024 for $3,200 each ($6,400 total, including a $12 exchange fee, so cost basis = $6,412). He traded both ETH for 0.12 BTC on May 2, 2025, when ETH was worth $2,000 each ($4,000 total) and BTC was worth $33,333 (0.12 BTC = $4,000). He sold 0.06 BTC on August 10, 2025 for $3,200.

Transaction 1 — ETH→BTC trade (May 2, 2025):

• Date acquired: 03/15/2024 | Date sold: 05/02/2025 (held 13 months → long-term)
• Proceeds: $4,000 (fair market value of 0.12 BTC received)
• Cost basis: $6,412
• Loss: ($2,412) — long-term capital loss
• Cost basis in new BTC: $4,000 (the FMV of BTC at acquisition)

Transaction 2 — BTC sale (Aug 10, 2025):

• Date acquired: 05/02/2025 | Date sold: 08/10/2025 (held 3 months → short-term)
• Proceeds: $3,200 (selling 0.06 BTC at $53,333/BTC)
• Cost basis: $2,000 (0.06/0.12 × $4,000)
• Gain: $1,200 — short-term capital gain

Net result: $1,200 short-term gain − $2,412 long-term loss. After netting (the $2,412 long-term loss offsets $1,200 of short-term gain; $1,212 net long-term loss remains), Marcus can deduct $1,212 against ordinary income on Schedule D.

Common Crypto Reporting Mistakes to Avoid

• Ignoring small transactions. There is no minimum transaction size for reporting. A $15 purchase at Starbucks paid in Bitcoin is a taxable event. The gain may be tiny, but it must be reported.
• Treating a 1099-DA as complete. For 2025 transactions, your 1099-DA shows only proceeds, not your cost basis. Reporting proceeds alone without basis would make your entire transaction amount appear as taxable gain.
• Not tracking wallet-to-wallet transfers. Sending ETH from Coinbase to your Ledger hardware wallet is not a sale — but you must keep records showing both addresses are yours. Without records, the IRS may treat the outflow as a sale.
• Forgetting DeFi and NFT transactions. Swapping tokens on Uniswap, minting NFTs, selling NFTs — all are taxable events. The IRS has no DeFi carve-out. NFT sales are reported the same as any other capital asset on Form 8949, though collectibles may be subject to the 28% rate.
• Using the wrong FMV date. For crypto-to-crypto trades, proceeds equal the fair market value of the asset received on the transaction date, not the value a day later or the price you hoped to get.

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