How to Report Crypto on Tax Returns in 2025: A Clear Step-by-Step Guide

Every time you buy, sell, trade, or even spend cryptocurrency, the IRS sees a taxable event. Not because they’re watching your wallet - but because crypto is property, not cash. That’s been the rule since 2014, and as of 2025, the IRS is finally making it impossible to ignore.

Why Crypto Taxes Are Different from Stocks

If you’ve ever sold a stock, you got a Form 1099-B from your broker. It told you exactly what you bought, what you sold it for, and your profit. Crypto used to be the Wild West. No reports. No help. Just you, your exchange history, and a prayer.

That changed on January 1, 2025. Now, exchanges like Coinbase, Kraken, and Binance.US must send you Form 1099-DA. But here’s the catch: it only shows the gross proceeds - the total dollars you got when you sold. It doesn’t tell you what you paid for it. That’s on you.

Think of it like this: you sold 0.5 BTC for $18,000. The 1099-DA says $18,000. But if you bought that same 0.5 BTC for $10,000 two years ago, your taxable gain is $8,000. If you bought it for $16,000? Only $2,000 gain. The IRS doesn’t know which one it is. You have to figure it out.

What Counts as a Taxable Event

You don’t just owe taxes when you cash out. Every move can trigger a tax bill:

• Selling crypto for USD - obvious gain or loss
• Trading one crypto for another - like BTC for ETH - treated as a sale of the first
• Spending crypto - buying coffee, a laptop, or a NFT with Bitcoin? That’s a sale
• Earning crypto - from staking, mining, airdrops, or as payment for work - taxed as ordinary income
• Receiving crypto as a gift - not taxed when received, but you inherit the giver’s cost basis
• Donating crypto - no tax if you hold over a year; you can deduct fair market value

The big trap? People think “I didn’t cash out, so I don’t owe.” Wrong. Swapping ETH for SOL? Taxable. Buying a NFT with USDC? Taxable. Even sending crypto to a friend as a gift can be a problem if you’ve held it for less than a year - you’re still selling it at fair market value.

Where to Report Crypto on Your Tax Return

You’ll need three forms:

1. Form 1040 - The main tax form. Answer “Yes” to the digital asset question. If you say “No” and you had any activity, you’re lying under penalty of perjury.
2. Form 8949 - Lists every single crypto sale, trade, or disposal. You need the date you bought it, date you sold it, cost basis, proceeds, and gain/loss.
3. Form Schedule D - Summarizes your capital gains and losses from Form 8949. This goes on your 1040.

If you earned crypto as income - say, from staking rewards or getting paid in Bitcoin - that goes on Form Schedule 1 (for individuals) or Form Schedule C (if you’re self-employed).

Cost Basis Is Your Most Important Number

Cost basis = what you paid for the crypto, plus fees. That’s the anchor for your gains.

Before 2025, you could average your cost basis across all your holdings. Now? The IRS says: wallet-by-wallet. You can’t mix your Coinbase coins with your Ledger coins. Each purchase in each wallet must be tracked separately.

Example: You bought 1 ETH on Coinbase for $1,500 with a $5 fee. Cost basis = $1,550. Later, you bought another 1 ETH on Kraken for $1,600 with a $3 fee. Cost basis = $1,603. If you sell the first ETH, you can’t use the $1,603. You have to use $1,550.

This makes manual tracking a nightmare. If you transferred crypto between wallets without noting the cost basis, you’ve lost it forever. The IRS doesn’t care about your memory.

What Exchanges Will (and Won’t) Report

Only centralized exchanges that hold your keys - like Coinbase, Kraken, Binance.US - must file Form 1099-DA. They report gross proceeds starting in 2025. Cost basis reporting starts in 2026.

Decentralized exchanges? Like Uniswap, SushiSwap, or PancakeSwap? They don’t report. Ever. And they won’t, thanks to the DeFi Broker Rule repeal signed in April 2025. Same with peer-to-peer trades, wallet-to-wallet transfers, and crypto paid directly by a client.

That doesn’t mean you don’t owe taxes. It just means you’re on your own. The IRS can still trace those transactions using blockchain analysis tools. They’ve been doing it since 2023. And they’re getting better.

What You Must Track for Every Transaction

You need these five pieces of data for every crypto move:

• Date - When the transaction was confirmed on the blockchain
• Amount - How much crypto you bought, sold, or traded
• Value in USD - Fair market value at the exact time of the transaction (use a reputable price source like CoinMarketCap or CoinGecko)
• Transaction type - Purchase, sale, trade, staking reward, airdrop, payment, etc.
• Counterparty - Exchange name, wallet address, or person you traded with

Write it down. Save screenshots. Use a spreadsheet. But don’t rely on your exchange’s “transaction history” - they can go offline, get hacked, or shut down. Your records are your only defense.

How to Use Crypto Tax Software

Most people who report crypto taxes in 2025 use software. TurboTax, Koinly, CoinTracker, and TokenTax all connect to over 300 exchanges and wallets. They auto-import your transactions, calculate gains, and generate Form 8949 and Schedule D.

Here’s what they do for you:

• Auto-match buys and sells across multiple wallets
• Apply FIFO, LIFO, or specific identification methods (you choose)
• Calculate staking rewards as income
• Flag airdrops and hard forks
• Export directly to TurboTax or TaxAct

Cost? $50-$150 a year, depending on your transaction volume. That’s cheaper than paying a CPA $250 to fix your mistakes.

Common Mistakes That Trigger Audits

The IRS has flagged these five errors as top audit triggers in 2025:

1. Not reporting airdrops - If you got free tokens from a fork or promo, they’re taxable income at fair market value on the day you received them. 32% of audits start here.
2. Misclassifying staking rewards - Are they income? Capital gain? The IRS says income. But many people treat them like dividends and wait to tax them on sale. That’s wrong.
3. Forgetting to report small trades - Even if you only made $50 profit on a trade, you still have to report it. The IRS doesn’t have a minimum.
4. Using average cost basis - That method is gone. If you used it in 2024 and carried it into 2025, you’re at risk.
5. Saying “No” to the digital asset question - The IRS cross-checks 1099-DA data with your return. If they see you traded and you said “No,” you’re flagged.

Average penalty for a single crypto error? $1,850. For multiple errors? Often $5,000+.

What to Do If You Didn’t Report Crypto Before

If you’ve been ignoring crypto taxes for years, don’t panic. But don’t wait either.

The IRS has a Voluntary Disclosure Program. You can file amended returns for past years (2021-2024) and pay what you owe with reduced penalties. You’ll need to reconstruct your transaction history - which is hard, but doable with software.

Most tax pros recommend starting with 2023 and working backward. If you had under $10,000 in total crypto activity across all years, you might qualify for a streamlined filing. If you had more? Talk to a CPA who specializes in crypto.

What’s Coming in 2026 and Beyond

In 2026, exchanges will start reporting cost basis on Form 1099-DA. That’s a huge win - but only if you use one of the big exchanges. If you trade on DeFi or use multiple wallets, you’re still on your own.

The IRS is also working on new rules for NFTs and staking. They’ve already updated Form 8949 instructions to include NFT sales. And they’re reviewing the Southerland v. IRS case - which could change how staking rewards are taxed.

Meanwhile, Congress is still debating new crypto reporting rules. Senator Lummis’s Digital Asset Market Structure Bill could bring back some DeFi reporting by late 2026.

Bottom line: The rules are changing fast. But the core principle won’t: every crypto move has tax consequences.

Next Steps: Your 5-Minute Action Plan

If you’re reading this in December 2025, here’s what to do right now:

1. Collect all your wallet addresses - including hardware wallets, mobile wallets, and exchange accounts.
2. Export transaction history from every platform you used since 2021.
3. Use crypto tax software - pick one (Koinly or CoinTracker are popular) and import your data.
4. Review your 2025 gains - make sure you didn’t miss any trades, airdrops, or staking rewards.
5. Answer “Yes” to the digital asset question on Form 1040 - and file your return before April 15.

Don’t wait until the last week. Crypto tax prep takes time. The average user with 10-15 transactions spends 15-20 hours on it. Active traders? 40+ hours.

The IRS isn’t bluffing. They’ve hired 2,500 people just to chase crypto taxes. They’re using blockchain forensics. They know when you sent crypto from one wallet to another. They know when you bought it. They know when you sold it.

You don’t need to be a tax expert. But you do need to be careful.