When crypto first gained prominence more than 15 years ago, one of the big selling points of the currency was its lack of ties to any specific government. Unlike fiat currency, cryptocurrency offered the possibility of a purely mathematical currency that was unrelated to politics, governance, or taxes.
While crypto is still touted as an alternative to fiat currency, such as the U.S. dollar, the real world of politics, governance, and taxes has found a way to intrude on the use of this alternative currency in America. Specifically, the IRS requires U.S. taxpayers to report crypto earnings 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 include the kind of tear-your-hair-out complexity that makes you want to forgo money altogether and return to the barter system. That’s why we spoke to personal finance expert Robert Farrington about how to handle tax filing when you have crypto assets.
Here’s what we learned.
How you received your crypto matters
There are several ways you can find yourself the proud owner of cryptocurrency:
- You might receive crypto as a payment for goods or services
- You might mine it yourself
- You might purchase it as an investment
Depending on how the crypto came into your possession can affect how you report it on your taxes, and Farrington explains that this can make your taxes complex as a result.
Crypto as income
If you accept crypto as a 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 the currency. You need to report it as the USD value at the time you received it,” Farrington says.
For example, let’s say you received 0.25 Bitcoin on August 31, 2025, as payment for your business’s services. Bitcoin was worth $108,236.71 USD on that day, which means you’ll need to report your 0.25 Bitcoin income as $27,059.18, even if you did not immediately convert the cryptocurrency into USD.
“When or if you convert the crypto to USD, you’ll have a secondary transaction that may have a capital gain or loss associated with it,” Farrington explains. (More on that below.)
It’s also important to note that mining your own crypto is also treated as income, which could either be considered business income or hobby income. “If it’s mined as part of a business, you can also potentially deduct related business expenses, like computer hardware, software, or utility costs,” Farrington says.
Crypto as investment
Investing in crypto has become much more mainstream in recent years, and the tax rules governing cryptocurrency investments are largely the same as the rules for other investments.
In particular, like other types of investments, short-term and long-term capital gains rules apply to cryptocurrency gains and losses. For any cryptocurrency you’ve held for less than one year, short-term capital gains or loss rules apply, while any crypto you’ve held for longer than a year will fall under long-term capital gains or loss rules.
Where things get a little confusing is how you experience capital gains or losses with crypto: by converting your crypto into USD.
“When you convert the crypto to fiat currency, like USD, you’ll typically pay capital gains taxes on it,” Farrington says. That’s because you will usually convert the crypto at a higher currency exchange rate than you purchased 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. When you convert the asset into USD, you would have a long-term capital gain of $8,000.
Don’t forget to account for crypto shopping
Another confusing aspect of reporting crypto on your taxes is the fact that you can have a capital gain or loss when you pay for goods or services via cryptocurrency.
Here’s how it works: In any transaction where 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 gone up, that’s a capital gain, which means you’ll have to pay the capital gains tax. If the FMV has gone down, that’s a capital loss, which you may be able to use to offset future gains or income.
The IRS is getting more aggressive
As with any new technology, cryptocurrency operated in a kind of lawless Wild West environment before legislation, regulations, and tax law got a chance to catch up with the new state of affairs. With the new reporting requirements for the 2026 tax filing season, the IRS is now catching up to—and getting more aggressive—with crypto.
“This year, for the 2025 tax year, centralized exchanges will be required to file form 1099-DA with the IRS to report digital asset sales,” Farrington says. 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 was more reliant on self-reporting.
This is why Farrington says it’s essential that you ensure your crypto transactions are accurately reported on your tax return, or it could trigger an audit. Meticulous crypto bookkeeping is a must, and Farrington suggests taking the time to ensure that your transactions are accurately categorized on the exchange so there are no incorrect 1099s filed.
“For example, if you transfer tokens between exchanges, you may want to go in and make certain it’s categorized as a transfer so that the exchange doesn’t mistakenly report it as a gain,” Farrington recommends. A little bit of extra preparation, documentation, and double-checking can give your tax season some important peace of mind.
Virtual currency, real taxes
Cryptocurrency may not feature portraits of Washington, Lincoln, Hamilton, or Jackson, but that doesn’t keep Uncle Sam’s sticky fingers out of your virtual wallet. American taxpayers have to report their crypto income, investments, gains, 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 good records of your crypto assets will help you tame the tax filing beast—but Farrington stresses that “If you’re not familiar with these concepts to begin with, you should definitely seek advice from a tax professional.”
