If you’re investing in or spending Bitcoin, cryptocurrency, and non-fungible tokens (NFTs), you might not realize that you need to report those transactions on your tax return. The IRS has made it clear: digital assets like cryptocurrencies are taxable. So you need to know how to track and report your transactions for tax purposes.

Don’t worry — we’re here to guide you through the process. By the end of this article, you’ll understand what’s required and what constitutes a “taxable event,” and you’ll have a few recommendations for tools to make your life a lot easier.

How are digital assets treated for tax purposes?

Virtual currency like Bitcoin, Litecoin, Ethereum and others isn’t actually “currency” in the eyes of the IRS. Instead, it’s treated like other capital assets. So selling, exchanging or otherwise disposing of digital assets can result in a capital gain or loss, similar to selling stocks and other securities.

You calculate your capital gain or loss by subtracting your basis from the sales price (or the fair market value of the goods or services you received in exchange). And just like selling stocks, the capital gain or loss depends on how long you hold the asset.

If you hold onto your coins for over a year, it’s a long-term capital gain or loss. Long-term capital gains benefit from lower long-term capital gain tax rates ranging from 0% to 20%. For short-term capital gains—those on assets held for one year or less—you pay the same tax rate you pay on other types of income: 10% to 37%, depending on your federal income tax bracket.

But what’s your basis?

In tax lingo, the “basis” of a digital asset is simply how much you paid for it, including any fees.

So, let’s say you paid $500 for ten tokens. Your cost basis is $500, or $50 per token.

If the value rises and you later sell five of those tokens for $1,000, your capital gain would be $750. That’s your sales price of $1,000 minus the basis of $250 ($50 x five tokens).

The challenge of reporting transactions with digital assets

What makes tracking and reporting digital assets to the IRS complicated is you might not just buy, hold, and sell them. All kinds of cryptocurrency transactions are taxable events.

For digital assets, common taxable events include:

• Selling your digital assets for fiat currency (like U.S. dollars)
• Trading one type of digital asset for another
• Using digital assets to purchase goods or services
• Receiving digital assets as income (e.g., mining or staking rewards)
• Interest earned on digital currency

Plus, you might have multiple different cryptocurrencies and other digital assets spread across various platforms and wallets or move digital assets from one platform or wallet to another. This makes tracking the basis of digital assets challenging.

Recently, lawmakers took a step toward making it easier to report digital asset transactions. A new law will require brokers to report sales of digital assets on a new 1099 form: the soon-to-be-released Form 1099-DA. However, this requirement goes into effect for transactions on or after January 1, 2025. So, for now, it’s still mostly up to you to determine your basis and track and report sales and exchanges of digital assets.

Plus, even after the law goes into effect, there will likely be some gaps in reporting. Exchanges and platforms might not have all the information they need to report your cost basis accurately. For example, if you purchased a digital asset on one platform and transferred it to another exchange years ago, the new exchange might not have accurate basis information.

So how do you track your basis?

To accurately report the digital asset income, you need to keep detailed records of each transaction, including:

• The date you bought it
• The amount and type of digital asset acquired
• The value measured in U.S. dollars at the time of acquisition
• Any associated fees
• The date you sold, exchanged, or otherwise disposed of the digital assets
• The fair market value you received for sales and exchanges

One more wrinkle in the tax implications of figuring out your taxable income from digital assets is that there’s more than one way to calculate your cost basis.

In the example above, we used the specific identification method because we knew the buying price of each token sold. But what if you buy and sell multiple lots of tokens over several years? Will you know exactly which token you’re selling?

If meticulously accounting for every individual token isn’t your jam, you can use the first-in, first-out (FIFO) method instead. This method assumes the first digital asset you buy is also the first one you sell.

There are other options for calculating your cost basis, including highest-in, highest-out, average cost basis, and last-in, first out. However, FIFO and Specific Identification are the only methods supported by the IRS. An alternative method might cause trouble if the IRS audits your digital asset transactions.

Hit the easy button: Using cryptocurrency tax software

Let’s face it: manually tracking every transaction can be a real headache—especially if you’re actively trading or using multiple wallets and exchanges. That’s where third-party software comes in handy.

Several options are available, including Koinly, CoinTracker, and CoinLedger.

The features might vary slightly from app to app, but they simplify ownership of digital assets by:

• Automatically importing transactions from various wallets and exchanges
• Calculating your gains and losses based on your transaction history
• Generating detailed tax reports ready for submission to the IRS

Before investing time and money into a digital asset tracking tool, discuss it with your tax advisor. Some consumer-grade tracking solutions don’t accurately calculate capital gains taxes because they don’t account for fees.

Reporting Your Digital Assets

When tax season rolls around, you’ll need to report your digital asset transactions on your tax return. You’ll use Form 8949 to report your transaction details and Schedule D to summarize your capital gains and losses.

Don’t forget to answer the digital asset question on the front of your Form 1040 and report any interest or income received in the form of digital assets (like mining rewards) as ordinary income.

If you need help understanding how to track and report the basis of your digital assets transactions to the IRS, please reach out. We’re here to help you navigate the complexities of digital asset taxation and keep the IRS out of your hair.