With the increasing popularity of digital assets, like cryptocurrencies, the IRS has flagged this as a focus area for the agency.

Here are the basics of staying compliant with the federal tax-related reporting requirements.

What Counts as a Digital Asset According to the IRS?

Per the IRS, a digital asset is an electronic representation of valued property that is recorded on a cryptographically secured distributed ledger, blockchain, or similar technology. Some examples of digital assets include:

• Cryptocurrencies, such as Bitcoin or Ethereum
• Stablecoins, which are digital currencies tied to the value of a fiat currency like the U.S. dollar, and
• Non-fungible tokens (NFTs), which represent ownership of unique digital or physical items.

How to Answer the Digital Assets Question on Form 1040

On page 1 of your 1040 federal tax return, there is a section called “Digital Assets.” You must answer the “yes” or “no” question asking if you received, exchanged, or disposed of any digital assets.

You would check the “yes” box if any of the following applied during the year:

• Received digital assets as compensation, rewards or awards,
• Acquired new digital assets through mining, staking or a blockchain fork,
• Sold or exchanged digital assets for other digital assets, property or services, or
• Disposed of digital assets in any way, including converting them to U.S. dollars.

You would check the “no” box if any of the following applied during the year:

• Held digital assets in a wallet or exchange,
• Transferred digital assets between wallets or accounts you own, or
• Purchased digital assets with U.S. dollars.

How to Report Digital Asset Transactions on your Tax Return

For each transaction, you must calculate the Fair Market Value (FMV) of the asset in U.S. Dollars at the date of exchange. For example, if you purchased one Bitcoin for $89,000 on April 28, 2025, your cost basis for that Bitcoin would be $89,000.

The sale or exchange of a digital asset may result in a taxable gain or loss that you will report on your tax return. A gain occurs when the asset’s FMV at the time of sale exceeds your cost basis, and a loss occurs when the FMV is less than the cost basis.

Example: If you accepted one Bitcoin worth $95,000 plus $5,000 in cash for a car with a cost of $70,000, you would report a taxable gain of $30,000. The holding period of the car determines whether this gain is short-term or long-term.

• Did you own the asset for more than a year? This is classified as a long-term gain.
• Did you own the asset for less than a year? This is classified as a short-term gain.

Crypto Income for Employees and Independent Contractors

Digital asset transactions have their own tax rules for businesses. If you are an employee being paid in crypto, the FMV at the time of payment is treated as wages and subject to standard payroll taxes. These wages are reported on Form W-2.

If you are an independent contractor compensated with crypto, the FMV is reported as non-employee compensation on Form 1099-NEC if payments exceed $600 for the year.

Does the Wash Sale Rule Apply to Crypto?

The IRS classifies digital assets as property and not securities. Because of this classification, wash sale rules do not apply, so if you sell a digital asset at a loss and then buy it back shortly after, you can still claim the loss on your tax return.

However, the wash sale rule does apply to crypto-related securities, such as stocks of cryptocurrency exchanges.

Understanding Form 1099 for Crypto Transactions

Depending on how you receive, exchange, or acquire a digital asset, you may receive a:

• Form 1099-MISC – for prizes and awards, other income payments
• Form 1099-K – for payment from an app or online marketplace
• Form 1099-B – for barter and broker transactions
• Form 1099-DA – a new form used to report digital asset transactions

These forms are sent to the IRS, so it is important that the numbers reported on your tax return agree with the figures on these forms.

Ensuring Compliance with Changing Digital Asset Tax Rules

The world of digital assets is evolving quickly, and the tax rules can be tricky. Make sure you are maintaining all related records, including transaction dates, FMV data, and cost basis. With the complex nature of digital assets and their taxation, Wegner CPAs tax advisors can help report your crypto transactions accurately – reach out to learn more.