Cryptocurrency Tax Guide: DeFi, NFTs, Staking, Mining, and the New 1099-DA Reporting

Cryptocurrency taxation is one of the most rapidly evolving and most aggressively enforced areas of the U.S. tax code. The IRS treats digital assets as property — not currency — meaning every transaction (trade, swap, payment, even some DeFi interactions) creates a potentially taxable event. Combined with the Infrastructure Investment and Jobs Act's broker reporting requirements taking effect, the era of unreported crypto activity is closing rapidly.

The Property Classification

IRS Notice 2014-21 established the foundational rule: virtual currency is treated as property for federal tax purposes, not as currency. This single classification creates the entire framework for crypto taxation:

• Each disposition (sale, trade, swap, payment) is a taxable event.

• Gain or loss = sale price minus basis.

• Holding period determines short-term (≤1 year) vs long-term (>1 year) treatment.

• Wash sale rules currently do NOT apply to crypto (though legislation has been proposed).

The Form 1040 Crypto Question

Since 2019, the federal individual tax return (Form 1040) has included a question on the front page asking whether the taxpayer received, sold, exchanged, or otherwise disposed of digital assets during the tax year. The question is signed under penalties of perjury — answering "no" while crypto activity occurred constitutes potential tax fraud.

The 2025 question wording is broad and captures activities including:

• Receiving crypto as payment for goods or services.

• Selling crypto for fiat.

• Exchanging one crypto for another.

• Receiving crypto from staking, mining, airdrops, or hard forks.

• Receiving NFTs.

• Transferring crypto out of a custodial wallet to a self-custody wallet (specifically excluded as not a taxable event but the transfer should still be tracked).

Common Taxable Events

Crypto-to-fiat trade: Selling Bitcoin for U.S. dollars triggers capital gain or loss based on the difference between sale proceeds and basis.

Crypto-to-crypto trade: Trading Ethereum for Solana triggers capital gain or loss on the disposition of Ethereum AND establishes new basis in Solana at the fair market value at the time of trade. Each leg of the trade is a separate event.

Spending crypto: Buying coffee with Bitcoin triggers capital gain or loss based on the difference between the coffee price (basis transferred) and the Bitcoin's basis.

Receiving crypto for services: Crypto received as payment for services is ordinary income at the fair market value on the date of receipt. The fair market value also becomes the basis for future gain/loss calculation.

Mining and staking rewards: Income at fair market value on the date of receipt; ordinary income generally.

Airdrops and hard forks: Income at fair market value on the date of constructive receipt (when control is established).

NFT minting and sales: Sale of an NFT generates capital gain or loss; minting fees may be deductible business expenses for active creators.

Non-Taxable Events

• Buying crypto with fiat (no taxable event; establishes basis).

• Holding crypto without disposition.

• Transferring crypto between wallets you own.

• Gifting crypto (subject to gift tax reporting if over annual exclusion).

• Donating crypto to a qualified charity (deductible at FMV if held over one year, with certain limitations).

Basis Tracking and Lot Selection

Accurate basis tracking is critical and increasingly difficult given the volume of transactions for active traders. The IRS allows two primary methods:

• FIFO (First In, First Out): Default method; the earliest-acquired units are deemed sold first.

• Specific Identification: The taxpayer chooses which specific lots to dispose of, optimizing tax outcomes.

Specific identification requires meeting strict documentation requirements: at the time of sale, the taxpayer must identify the specific lot being sold by acquisition date, acquisition cost, and other identifying details. Many crypto tax software packages support specific identification with appropriate documentation.

DeFi Tax Complexity

Decentralized finance protocols create some of the most complex tax situations:

• Liquidity pool deposits: Often treated as a deposit (not a taxable disposition), but specific protocol mechanics matter — some pools issue tokens that may constitute a property exchange.

• Yield farming: Rewards earned are ordinary income at fair market value when received.

• Lending protocols: Interest earned is ordinary income.

• Wrapped tokens: The tax treatment of wrapping tokens (e.g., wBTC for BTC) is unsettled — many practitioners treat as a non-taxable conversion, but conservative reporting may treat as a disposition.

• Bridging: Moving tokens across blockchains; treatment is generally similar to wrapping.

• Flash loans: Generally non-taxable due to atomic execution within a single transaction.

NFT Tax Treatment

NFTs (non-fungible tokens) follow standard property treatment with some unique considerations:

• NFT purchases with crypto: Triggers capital gain/loss on the crypto used to pay.

• NFT sales: Capital gain/loss based on holding period.

• NFT royalties: Generally ordinary income to the original creator.

• Collectible classification: The IRS issued guidance suggesting some NFTs may be "collectibles" subject to the higher 28% long-term capital gains rate. The classification is fact-specific.

Mining Income and Self-Employment Considerations

Crypto mining income is treated based on the scope of the activity:

• Hobby mining: Income on Schedule 1 line 8; expenses limited to hobby loss rules.

• Business mining: Income on Schedule C; expenses fully deductible; subject to self-employment tax.

For business miners, deductible expenses include electricity, equipment depreciation, internet, hosting fees, mining pool fees, and other ordinary and necessary business expenses.

Staking and PoS Rewards

Proof-of-stake rewards have generated substantial controversy and litigation. The IRS position:

• Staking rewards are ordinary income at fair market value when the taxpayer obtains control over the rewards.

• A 2023 court case (Jarrett v. United States) initially suggested staking rewards may not be income until disposed of, but the case was dismissed before final resolution.

• Current practitioner consensus is to report at receipt — pending further IRS guidance or litigation.

Lost, Stolen, or Worthless Crypto

Following the elimination of the personal casualty loss deduction by TCJA, lost or stolen personal-use crypto is generally not deductible for tax years 2018-2025.

For business or investment crypto:

• Theft losses may be deductible on Form 4684 if specific requirements are met (federal disaster declaration not required for business/investment property).

• Worthless securities treatment under §165(g) does not apply to crypto since crypto is property, not securities.

• Documenting the loss event (transaction hashes, exchange records, police reports) is essential.

The Form 8949 and Schedule D Reporting

Crypto dispositions are reported on Form 8949 (Sales and Other Dispositions of Capital Assets), with totals flowing to Schedule D. For active traders with hundreds or thousands of transactions, software tools (Koinly, CoinTracker, TokenTax, ZenLedger) generate the required reporting.

The IRS allows aggregated reporting on Form 8949 with detailed records maintained, but specific identification details must be available on examination.

Coming Broker Reporting (Form 1099-DA)

Beginning with tax year 2025, U.S. crypto brokers must issue Form 1099-DA (Digital Asset Transactions) reporting customer dispositions to the IRS. This dramatically increases IRS visibility into crypto activity and reduces the practical possibility of unreported activity.

Affected platforms include centralized exchanges (Coinbase, Kraken, Gemini), payment processors handling crypto, and certain custodial wallets. DeFi reporting requirements were initially proposed but face implementation challenges and ongoing legislative debate.

Foreign Crypto Reporting

Crypto held on foreign exchanges may trigger FBAR (FinCEN Form 114) and Form 8938 reporting requirements. The IRS has been inconsistent on this question — Treasury issued guidance in 2020 indicating crypto would be added to FBAR reporting, but final rules have not been issued. Conservative reporting includes foreign crypto holdings on FBAR if total foreign accounts exceed $10,000.

Common Mistakes

• Answering "No" to the digital asset question on Form 1040 when crypto activity occurred.

• Failing to recognize crypto-to-crypto trades as taxable events.

• Inaccurate basis tracking for legacy holdings or transactions across multiple exchanges.

• Missing staking and mining rewards as ordinary income.

• Treating wrapping or bridging as non-taxable without documentation supporting the position.

• Failing to file FBAR for foreign exchange holdings.

• Not retaining transaction logs from defunct exchanges.

Bottom Line

Cryptocurrency taxation is technically complex, aggressively enforced, and getting more visible to the IRS every year. For anyone with significant crypto activity — particularly DeFi, NFTs, staking, or active trading — working with a CPA who genuinely understands digital asset taxation is essential. Quality crypto tax software is necessary but not sufficient; the strategic decisions around lot selection, entity structuring, and timing of dispositions require expert judgment that no software replaces.