Don’t forget to report your gains from crypto — the IRS already knows about them

While the exact amount is up for debate, the IRS estimates that it loses billions of dollars each year due to taxpayers underreporting the income they receive from trading cryptocurrencies and other digital assets. For several years, the agency has been working to better enforce the rules around crypto trading and ensure that taxpayers are accurately reporting their gains from digital assets transactions.

In the past, it has been up to taxpayers to accurately and truthfully report the entirety of their crypto trading activities, including gains or losses, as well as the fair market value of the asset at the time of transaction. Some brokers and crypto exchanges may have provided reporting, but they had no obligation to do so. This has been a point of frustration for both the IRS and taxpayers alike, as there have been no standardized reporting requirements to follow up to this point.

The new rules of crypto reporting

But under a law passed by Congress as part of the 2021 Infrastructure Investment and Jobs Act, crypto exchanges and brokerages will soon be required to report their customers’ transaction details, including cost basis and sales proceeds, directly to the IRS using form 1099-DA. This shift to third-party reporting represents a major breakthrough for the IRS, as this will be the first time they have such a clear picture of what each crypto holder owns.

These new rules mirror the reporting requirements that have been enforced against traditional brokerage firms regarding the way they report sales from stocks and other securities for years. However, the rules were not finalized by the Treasury Department until 2024 and will take effect starting with any transactions taking place in 2025. That said, investors should not assume that they will receive a pass for 2024, as many crypto brokerages and exchanges have already been providing such information to the IRS voluntarily.

Keeping track of your crypto gains

While crypto brokerages will begin to shoulder the responsibility of accurately reporting transactions under these new IRS rules, the ultimate burden still lies with the taxpayer. Active traders who transfer assets between platforms or engage in more complex activities, such as yield farming or staking, should carefully examine each 1099-DA that they receive, looking for discrepancies between their own records and what was reported.

To help manage the complexity, crypto investors should keep a detailed transaction list that includes the dates of purchase and sale, asset type, ticker symbol and the value of the token at the date and time of each transaction. In addition, any exchange of crypto for goods or services is also tax liable and needs to be reported. Although this information can certainly be tracked using a basic spreadsheet, there are several companies that offer software capable of connecting to multiple exchanges and wallets and can consolidate all that data into one concise report.

Many third-party software applications even generate a pre-filled Form 8949 and Schedule D so that taxpayers who recognize a discrepancy between their own records and what was reported to the IRS can easily make the necessary corrections on their tax return.

Bottom line

The crypto tax landscape is evolving quickly, and 2025 will be a pivotal year. Up until this point, the IRS has relied primarily on taxpayers to self-report their holdings of digital assets, opening the door to incomplete or inaccurate data, or even an outright failure to report the trading income. But with the IRS set to begin receiving more accurate data directly from the trading platforms themselves, the agency will be better positioned to spot discrepancies between what taxpayers choose to report and what the government already knows.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.