Understanding cryptocurrency taxes and reporting requirements begins with recognizing that digital assets—including cryptocurrencies and NFTs—are treated as property by the IRS, not currency. This classification means all transactions involving buying, selling, trading, or using these assets for payments must be reported on federal tax returns, with income taxed as either capital gains or ordinary income depending on the activity. The IRS has intensified enforcement, with penalties for non-compliance and new reporting mandates for brokers starting in 2025. Taxpayers must answer a specific question about digital asset transactions on Form 1040 and maintain detailed records to calculate gains, losses, and taxable income accurately.

Key findings from the sources include:

• Mandatory reporting: All digital asset transactions must be disclosed on tax returns, with a dedicated question on Form 1040 requiring a "Yes" or "No" response ^[1][2].
• Taxable events: Selling, trading, mining, or using crypto/NFTs triggers tax obligations, while simply holding assets does not ^[3][9].
• Classification as property: Cryptocurrencies and NFTs are taxed like stocks or real estate, with capital gains rates applied to sales and ordinary income rates for activities like mining or staking ^[5][7].
• Enforcement and penalties: The IRS uses blockchain analytics to track transactions, and failure to report can result in audits, fines, or criminal charges, with a 758% increase in warning letters to crypto holders ^[7][5].

Cryptocurrency and NFT Tax Fundamentals

Reporting Requirements and Taxable Events

The IRS requires taxpayers to report all digital asset transactions, defining these as any activity involving cryptocurrencies, stablecoins, or NFTs recorded on a distributed ledger. The reporting process begins with a mandatory question on Form 1040, 1040-SR, or 1040-NR, where taxpayers must indicate whether they received, sold, exchanged, or otherwise disposed of digital assets during the tax year. Checking "Yes" obligates the taxpayer to report all related income, while "No" applies only if they solely held assets without transactions ^[1][2]. This question serves as a compliance trigger, with the IRS using it to identify potential underreporting.

Taxable events in the digital asset space are broad and include:

• Selling cryptocurrency or NFTs for fiat currency: The difference between the sale price and the original purchase price (cost basis) determines the capital gain or loss ^[3][6].
• Trading one cryptocurrency for another: Even swapping Bitcoin for Ethereum is a taxable event, with gains or losses calculated based on the fair market value at the time of the trade ^[9].
• Using crypto to purchase goods/services: Spending Bitcoin on a laptop, for example, triggers a capital gain or loss equal to the difference between the crypto’s value at purchase and its value at the time of the transaction ^[2].
• Receiving crypto as payment: Income earned in cryptocurrency (e.g., salaries or freelance payments) is taxed as ordinary income based on its fair market value when received ^[10].
• Mining or staking rewards: These are fully taxable as ordinary income at their fair market value when received, regardless of whether the crypto is immediately sold ^[3][9].
• Airdrops and forks: Free distributions of new tokens are taxable as ordinary income at their market value when they become accessible ^[9].

The IRS emphasizes that simply holding digital assets does not create a taxable event, but any disposition—including gifting, donating, or exchanging—must be documented ^[1]. For NFTs, additional complexities arise because they may be classified as collectibles, subjecting them to higher capital gains tax rates (up to 28%) compared to standard assets ^[6][8].

Calculating Gains, Losses, and Tax Liabilities

Calculating tax obligations for digital assets requires tracking the cost basis (original purchase price plus fees) and the fair market value at the time of each transaction. Capital gains or losses are determined by subtracting the cost basis from the proceeds of a sale or exchange. For example, if you buy 1 Bitcoin for $30,000 and sell it later for $50,000, you realize a $20,000 capital gain, taxed at either short-term or long-term rates depending on the holding period ^[2][10].

Key rules for calculations include:

• Holding period: Assets held for less than one year before sale are subject to short-term capital gains tax (rates align with ordinary income tax brackets, up to 37%). Assets held longer than one year qualify for long-term capital gains tax (0%, 15%, or 20% based on income) ^[6][10].
• NFT-specific rules: Selling an NFT may incur capital gains tax, while creating and selling an NFT (e.g., minting art) generates ordinary income equal to the sale price minus creation costs ^[8].
• Gas fees and transaction costs: These can often be added to the cost basis, reducing taxable gains. For example, if you spend $100 in Ethereum gas fees to purchase an NFT, that $100 increases your cost basis ^[6].
• Wash sale rule exemption: Unlike stocks, cryptocurrencies are currently not subject to the wash sale rule, meaning you can sell an asset at a loss, buy it back immediately, and still claim the loss ^[3].
• State-level variations: While federal rules apply uniformly, states like Wyoming treat crypto as property, while others like New York may impose additional sales taxes on transactions ^[5].

Taxpayers must use IRS Form 8949 to report capital gains and losses from digital assets, then summarize totals on Schedule D of Form 1040. For ordinary income (e.g., mining or staking), amounts are reported on Schedule 1 or Schedule C (for business income) ^[2][7]. The IRS is also introducing Form 1099-DA in 2025, which brokers will use to report gross proceeds and cost-basis data, increasing transparency and compliance ^[7].