Do You Have to Declare Cryptocurrency Profits? Ultimate Tax Guide 2025

Yes, You Absolutely Must Report Crypto Profits to the IRS!

Okay, so you’ve made some money with Bitcoin or maybe Ethereum, and now you’re wondering if Uncle Sam needs to know about it. Let me be crystal clear right off the bat: Yes, you must declare cryptocurrency profits on your tax return. The IRS is getting serious about crypto, and they’re not messing around anymore.

As someone who’s navigated these waters (and made a few mistakes along the way), I want to share everything you need to know about crypto taxes in 2025. The landscape has changed, and being ignorant about the rules isn’t an excuse the IRS will accept.

How the IRS Views Your Crypto

First thing’s first – the IRS doesn’t see cryptocurrency as actual currency. Weird, right? Despite the name, the IRS treats crypto as property for tax purposes. This means:

• Every sale, trade, or exchange can trigger a taxable event
• You’ll report capital gains and losses, similar to stocks
• Your profits will be taxed at either short-term or long-term capital gains rates
• You need to track your cost basis for every transaction (this is the headache part!)

According to the IRS guidance, digital assets include cryptocurrency, stablecoins, and even those trendy NFTs you might have bought. All of these fall under the same tax rules.

The Big Question on Tax Forms

Starting in 2023 the IRS modified Form 1040 to include a specific question about digital assets. It’s right at the top so you can’t miss it! The question asks

At any time during 2023, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange or otherwise dispose of a digital asset (or a financial interest in a digital asset)?

This question isn’t just on individual returns – it’s also been added to Forms 1041, 1065, 1120, and 1120-S. So whether you’re filing as an individual, trust, partnership, or corporation, you’ll need to answer this question truthfully

When to Check “Yes” on That Crypto Question

You’ll need to answer “Yes” to the digital asset question if you:

• Received crypto as payment for goods or services
• Got crypto as a reward or award
• Mined or staked cryptocurrency
• Received new coins from a hard fork
• Sold crypto for cash
• Traded one crypto for another crypto
• Used crypto to buy goods or services
• Participated in an airdrop

When Can You Check “No”?

Thankfully, not every crypto situation requires a “Yes” answer You can check “No” if you only

• Held crypto in your wallet without selling or trading
• Transferred crypto between wallets you own
• Purchased crypto with US dollars or other fiat currency

Simply buying and holding isn’t taxable – it’s when you dispose of the crypto that the tax implications kick in.

How Crypto Taxes Work in 2025

The tax rates depend on how long you held your crypto before selling or exchanging it:

2025 Short-Term Capital Gains Tax Rates

If you held your crypto for one year or less, you’ll pay your regular income tax rate on profits:

2025 Long-Term Capital Gains Tax Rates

For crypto held longer than one year, you’ll benefit from these lower rates:

How to Calculate Your Crypto Gains and Losses

I know this part can be confusing (I’ve spent many late nights trying to figure it out myself). Here’s the basic formula:

1. Determine your cost basis (what you paid for the crypto + fees)
2. Calculate your sale amount (what you received – fees)
3. Subtract your cost basis from your sale amount
4. If positive = capital gain; if negative = capital loss

Let me give you an example from my own experience:

I bought 1 Bitcoin for $10,000 in January and paid $100 in fees. My cost basis is $10,100.

In September, I sold that Bitcoin for $60,000 and paid $150 in fees. My sale amount is $59,850.

My capital gain is $59,850 – $10,100 = $49,750, which is taxed at my short-term capital gains rate since I held it less than a year.

Different Crypto Situations and Their Tax Implications

Mining or Staking Crypto

If you’ve earned crypto through mining or staking, that’s considered taxable income at the fair market value when received. You might get a Form 1099-NEC, but even if you don’t, you still need to report it.

Receiving Crypto as Payment

When someone pays you in Bitcoin or other crypto for goods or services, that’s taxable income based on the fair market value at the time you received it.

Using Crypto to Buy Things

Let’s say you use some Bitcoin to buy a new laptop. Even though you’re purchasing something, you’re also disposing of your crypto. If your Bitcoin increased in value since you got it, you’ll owe taxes on that gain.

Trading One Crypto for Another

This one surprises a lot of people. If you exchange $1,000 worth of Bitcoin for $1,000 worth of Ethereum, and you originally paid $300 for that Bitcoin, you have a $700 capital gain you need to report.

Airdrops and Hard Forks

Receiving new crypto through an airdrop after a hard fork generates ordinary income equal to the fair market value when received.

Can the IRS Track My Crypto?

You might think crypto is anonymous, but the IRS is getting better at tracking it. They’ve invested in blockchain analytics tools, and crypto exchanges are increasingly reporting transactions to the government.

Starting in tax year 2023, the American Infrastructure Bill requires crypto exchanges to send 1099-B forms reporting all transaction activity. And coming in tax year 2025, the IRS will require Form 1099-DA for certain crypto transactions.

Even Coinbase, which was hit with a John Doe Summons in 2016, now reports certain transactions to the IRS. Don’t think you can hide your crypto profits – the risks of getting caught aren’t worth it.

What Forms Will You Need to Report Crypto?

For most crypto sales and exchanges, you’ll need:

• Form 8949 (Sales and Other Dispositions of Capital Assets)
• Schedule D (Capital Gains and Losses)

If you received crypto as income, you might also need:

• Schedule C (for self-employment income)
• Schedule 1 (for hobby income)

Keep Records of ALL Your Crypto Transactions

This is where I made my biggest mistake – not keeping proper records. For each transaction, track:

• When you bought the crypto
• How much you paid (in USD)
• Any fees you paid
• When you sold or exchanged it
• How much you received
• Any fees on the sale/exchange

Crypto tax software can help import transactions from exchanges and wallets to make this process easier.

Are There Any Tax-Free Crypto Transactions?

Yes, there are a few situations where you might avoid taxes:

• Buying crypto with USD (not taxable until you sell)
• Donating crypto to qualified charities (may get a deduction without paying capital gains)
• Trading in tax-deferred accounts like IRAs
• Possibly qualifying for 0% long-term capital gains rate if your income is low enough

What About Lost or Stolen Crypto?

Unfortunately, the IRS doesn’t typically allow deductions for lost or stolen cryptocurrency. Even if your exchange gets hacked or you lose your wallet keys, you generally can’t deduct these losses to offset other gains.

Final Thoughts: Don’t Mess With the IRS on Crypto

Look, I get it. Crypto taxes are complicated and annoying. But failing to report your crypto transactions properly can result in penalties, interest, or even criminal charges in extreme cases.

The IRS is rapidly increasing enforcement in this area, and with exchanges now reporting directly to them, it’s just not worth trying to hide your crypto gains.

If you’re unsure about how to handle your specific situation, consider using tax software like TurboTax that specializes in crypto or consulting with a tax professional who understands digital assets.

Remember, this article isn’t exhaustive tax advice – everyone’s situation is different, and tax laws continue to evolve. But the bottom line remains the same: Yes, you absolutely need to declare your cryptocurrency profits to the IRS!

Long-term capital gains tax rates for crypto sales in 2026