Cryptocurrency & Federal Income Taxes
We help people who are interested in minimizing their cryptocurrency tax liability while remaining in full compliance with Federal and state tax law.
For a free thirty-minute consultation, please feel free to make an appointment.
This page was first posted in October 2017, when BTC was around $6,000, and ETH $300. It was a simpler time.
As I write, BTC has tanked 45% from its recent highs (briefly over $126,000 on October 5, 2025). Everything is relative! Enormous losses, if realized and properly reported to IRS, can be used to offset enormous gains in future years.
There is no legal way for a US citizen or permanent resident to avoid cryptocurrency taxation, but good planning and good execution can help you lawfully minimize your income tax liability. But cryptocurrency law is emergent law: a good-faith taxpayer and a good-faith IRS auditor may not always see eye-to-eye on the proper interpretation of the law. You need tax professionals who have wrestled with various crypto tax issues on many occasions.
Here's what we know now, based on the IRS's limited guidance on cryptocurrency. (This is an informal introduction.)
Notice 2014-21 Remains Our Primary Guidance
IRS first weighed in on the taxation of cryptocurrency ("virtual currency" in IRS-speak) with Notice 2014-21. Twelve years is a long time….
Subsequent guidance focused on the taxation of hard forks (e.g., Rev. Rul. 2019-24 and subsequent guidance memoranda from the IRS Chief Counsel). Not too many people worry about the tax consequences of hard forks these days!
Is wrapping & unwrapping BTC and ETH a taxable event? Good question, which IRS’s Notice 2024-57 (PDF, 75 KB) left unanswered.
When is cryptocurrency farming and staking income subject to the Net Investment Income Tax? Another good question.
Are NFTs held for more than one year taxable at the 20% long-term capital gains rate, or the 28% collectible rate? Well, they’re generally not “tangible personal property,” but Treasury is always looking for moola…..
I have had the privilege of representing several clients in IRS audit examinations of cryptocurrency returns. I try to work collaboratively with IRS revenue agents on these difficult, unsettled issues while representing my client’s interests vigorously.
Mining Cryptocurrency
Per Notice 2014-21, the fair market value of cryptocurrency received from mining is ordinary income on the date you obtain dominion and control over the coins. That amount becomes your basis in the mined units.
If your mining activity is conducted as a business, then your net mining income is subject to self-employment taxes, just as self-employed coal miners are. The good news: your ordinary and necessary business expenses (depreciation, hosting, electricity) offset that business income.
Depending on your total earned income, the incremental SE tax can be painful. Proper tax planning can mitigate the pain.
Gains and Losses on Cryptocurrency Trades
Again following Notice 2014-21, these gains and losses are similar in most respects to gains and losses on sales of securities.
March 2026 is a fine time to harvest capital losses, as the wash sale rules still do not apply to most digital assets. (An important exception is tokenized securities: remember that “stock or securities” are subject to the wash sale rules.) Expect a future Congress to revisit this issue. In the meantime, please keep the economic substance doctrine in mind: IRS may look through capital loss-harvesting if the initial position is reestablished within minutes.
How to calculate basis on gains? LIFO (last-in, first-out) basis had obvious advantages in a rapidly appreciating market. The best approach for you today depends on the quality of your historical records and your risk tolerance.
Broker Reporting and Form 1099-DA
Beginning in 2026, Coinbase, Gemini, and other custodial digital asset brokers are required to report the basis on all crypto sales using Form 1099-DA.
Transferring coins from one wallet you own to another wallet you own is not a trade. Of course, the basis of the transferred coins remains unchanged.
Accounting for these gains and losses is a major headache, especially if you are working with exported CSV files from multiple sources. There are good cloud-based software solutions. We work with several of these platforms on a regular basis.
And there are bad ones, too. We do our best to steer our clients away from substandard platforms.
We can help you choose the solution that fits your needs and your budget.
Foreign Income: General Painful Observation
Sorry, US citizens and permanent residents are subject to taxes on worldwide income. However, nonresident aliens are perfectly free to harvest long-term capital gains not effectively connected with a US trade or business prior to establishing residency in the USA!
Don't forget to make foreign financial disclosures where required: pay particular attention to the requirements of FinCEN Form 114 (FBAR) and IRS Form 8938. Under current rules, a foreign account that holds only virtual currency is generally not a reportable foreign financial account for FBAR purposes. gulations. However, if a foreign exchange account also holds fiat or other reportable assets and the aggregate maximum value of all such accounts exceeds $10,000, FBAR reporting will generally be required.
Some of you may need to file Form 8938 if the value of specified foreign financial assets (which can include interests in foreign platforms holding digital assets) exceeds the applicable thresholds.
This info is current as of March 2026; we expect changes in foreign reporting requirements!
Puerto Rico as the Ultimate Crypto Tax Shelter
As Stephen Sondheim observed, “Nobody knows in America / Puerto Rico’s in America.”
Interested in Act 60? It’s not for everybody, but we do have clients down there….
In November 2022, I wrote, “Now is a great time to make this move! When BTC is above $50,000 again, it will be too late….”
Better late than never? I don’t take the hype on Reddit seriously, but even I will admit that BTC could break $150,000 in the near future.
See this page for a bit more information.
Death and Taxes (and More Pleasant Things)
Some crypto investors who have passed away in the past year have a taxable cryptocurrency estate. The federal estate & gift tax exemption was $13.99 million in 2025; it’s now $15 million.
Even if the deceased's net worth was substantially less, their heirs might substantially benefit from filing an estate tax return to report stepped-up basis and dramatically reduce future capital gains. Even when a widow(er) inherits his or her spouse's estate tax-free, there still may be enormous benefits to filing an estate tax return for the deceased. We have already provided estate and gift tax services for several cryptocurrency families!
As we’re based in Chicago, I’d like to remind Illinois residents that the Illinois Estate Tax exclusion amount is a mere $4 million. Good planning is essential for Illinois residents. I am not an attorney, but I can work with your estate tax attorney to address cryptocurrency issues in estate tax planning.
Dying with too much crypto is no fun. Enjoy life: give some away to your loved ones! As of January 1, 2026, gifts in excess of $19,000 per giftee per year count against the gift-giver's lifetime exclusion. Are you contemplating giving or receiving a major gift of cryptocurrency? You may need to do some tax planning to maximize the effectiveness of the gift.
Again, I am not an estate tax attorney. Nor am I a CPA who specializes in estate tax or gift tax matters. But our firm routinely works in conjunction with specialists on gift and estate tax matters, including cryptocurrency matters. (Generally, we prepare these returns as the crypto tax specialists, and the estate tax specialist reviews our work product.)
Adversarial Dealings with the IRS
If you are an individual, partnership, or corporation doing battle with the IRS over crypto matters, please visit this page.
For a no-obligation thirty-minute consultation, please feel free to make an appointment.
Trading Crypto
Are you an arbitrage trader buying and selling on multiple exchanges all day long? You are my hero!
It would have been be a shame to have paid taxes on the top marginal rate for the first nine months of 2025, then get wiped out by the (not-so-hypothetical) Great Crypto Crash of 4Q2025. To add insult to injury, without proper planning, you would not be able to pair your capital losses against your ordinary income. If you qualify, a mark-to-market election under IRC Section 475(f) may make sense for you! (The window for individuals to make this election in a given tax year generally closes on April 15 of that year.) One issue: 475(f) elections are generally made for either traders in securities or traders in commodities (e.g., BTC, DOGE).
With proper disclosure beforehand, traders can divide their portfolios into “trading” and “investment” subportfolios.
If you are a trader, consider taking action now!
The Highest and Best Use of Appreciated Assets
If you are charitably inclined and you have large unrealized gains, consider donating virtual currency to your place of worship or favorite 501(c)(3) nonprofit organization. (In the process, you may also become cryptocurrency evangelists: the pastor at Sleepy Smalltown Church and the executive director of your local cat shelter will need to open Coinbase accounts!)
Gift the cryptocurrency without selling! Let the charity worry about converting to US dollars, and you get the tax writeoff.
PLEASE DO NOT sell and gift the proceeds! The sale would be a taxable event, and the charitable benefit would be offset by the taxable gain.
You report your noncash charitable contributions on Form 8283; if you are gifting assets with a fair market value of more than $5,000, remind the charity that they need to provide Form 8282 to you.