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

Every time you sell Bitcoin, trade Ethereum for Solana, earn staking rewards, or even buy coffee with Dogecoin, the IRS sees a taxable event. Not because they’re watching your wallet - but because crypto is property, not cash. And property sales trigger taxes. If you’ve held crypto in 2025, you’re required to report it. No exceptions. No loopholes. And the IRS is now catching up fast.

Why Crypto Taxes Are Different from Stocks

With stocks, your broker sends you a Form 1099-B with your buy and sell prices. You check it, plug it into TurboTax, and you’re done. Crypto? It’s not that simple. Until 2025, most crypto transactions flew under the radar. No forms. No alerts. No warnings. That changed on January 1, 2025, when the IRS finally forced centralized exchanges like Coinbase, Kraken, and Binance.US to start reporting every trade.

But here’s the catch: they’re only reporting the gross proceeds - the total amount you got when you sold or traded. Not your original cost. Not your fees. Not your profit. That means if you bought 1 BTC for $30,000 and sold it for $60,000, the exchange will report $60,000 as your income. But your actual gain? $30,000. You still have to calculate that yourself.

And if you moved crypto between wallets, traded on a decentralized exchange like Uniswap, or got paid in crypto? No 1099-DA comes. You’re on your own. That’s where most people mess up.

What Counts as a Taxable Event?

You don’t need to pay tax just for buying crypto with USD. But as soon as you move it - even if you don’t cash out - taxes can kick in. Here’s what triggers a taxable event:

• Selling crypto for fiat (USD, EUR, etc.)
• Trading one crypto for another (e.g., ETH for SOL)
• Using crypto to buy goods or services
• Earning crypto as income (staking, mining, airdrops, freelance payments)
• Receiving crypto from a hard fork (like Bitcoin Cash in 2017)

Even gifting crypto over $18,000 in value (2025 limit) requires reporting. And if someone sends you crypto as a gift? You don’t pay tax right away - but when you sell it later, your cost basis is the same as the original buyer’s. If you can’t prove that, the IRS assumes it’s $0. That means your entire sale amount becomes taxable gain.

Form 1099-DA: What It Does (and Doesn’t) Do

Starting in 2025, centralized exchanges must send you Form 1099-DA. It looks like a 1099-B, but it’s simpler. It shows:

• When you sold or traded crypto
• How much you received (gross proceeds)
• The exchange’s name and your account info

It does NOT show:

• What you originally paid (cost basis)
• Transaction fees
• Transfers between your own wallets
• DeFi trades, airdrops, or staking rewards

Cost basis reporting won’t start until January 1, 2026. So for 2025 taxes, you still have to track your purchase prices manually. If you bought Bitcoin in 2021 for $10,000 and sold it in 2025 for $45,000, you owe tax on $35,000 - even if the exchange only reports $45,000.

Where to Report Crypto on Your Tax Return

You’ll need three forms:

1. Form 1040 - Answer “Yes” to the digital asset question at the top. This is mandatory. Lie, and you risk criminal penalties.
2. Form 8949 - List every sale, trade, or disposal. Include date acquired, date sold, proceeds, cost basis, and gain/loss. You need this for every single transaction.
3. Form Schedule D - Summarizes your total capital gains and losses from Form 8949. This flows into your 1040.

If you earned crypto as income - say, from staking or being paid in Bitcoin - you report that on:

• Form Schedule 1 - For individuals (e.g., staking rewards, airdrops)
• Form Schedule C - If you’re self-employed and paid in crypto for services

The value you report? The USD fair market value on the day you received it. If you got 0.5 ETH on March 12, 2025, and it was worth $1,200 that day, you report $1,200 as income - even if ETH later dropped to $800.

Wallet-by-Wallet Accounting: The New Nightmare

Before 2025, you could average your crypto purchases. Buy 1 BTC in January, another in June, then sell one later? You could just say, “I bought 2 for $50,000, so my cost basis is $25,000 per coin.”

That’s gone. As of January 1, 2025, the IRS requires wallet-by-wallet accounting. You must track the exact purchase price of each coin, down to the transaction ID. If you bought 0.5 BTC in Wallet A for $28,000 and 0.5 BTC in Wallet B for $32,000, and you sell 0.7 BTC, you can’t just average. You have to pick which coins you sold - and prove it.

This is why transferring crypto between wallets without recording the cost basis is dangerous. If you move coins from Wallet A to Wallet B and forget to log the original purchase price, the IRS may assume you bought them for $0. That turns a $10,000 gain into a $10,000 tax bill - and you can’t prove otherwise.

What About DeFi, NFTs, and Airdrops?

The DeFi Broker Rule was repealed in April 2025. That means platforms like Uniswap, Curve, or Aave don’t have to report your trades. But that doesn’t mean your trades aren’t taxable. Every swap on Uniswap is still a taxable event. You just have to track it yourself.

NFTs? They’re treated like crypto. Buy an NFT for 2 ETH. Sell it for 3 ETH. You have a $1,500 gain if ETH was $1,500 at the time of sale. The IRS updated Form 8949 instructions in September 2025 to clarify NFT reporting.

Airdrops? Taxable as income when you receive them. If you got 100 tokens worth $500 on June 5, 2025, you report $500 as income. Even if the token later crashes to $5. You still owe tax on the $500.

How to Track Everything Without Going Crazy

You don’t have to do this manually. Tax software like Koinly, CoinTracker, and TokenTax can connect to over 300 exchanges and wallets. They pull your transaction history, calculate gains and losses, and generate Form 8949 automatically.

But here’s the key: you must connect all your wallets. If you use MetaMask, Ledger, and Coinbase, you need to link all three. Miss one? You miss a taxable event. And the IRS can now trace blockchain addresses across platforms. They’re not guessing anymore.

Most users spend 15-20 hours on their crypto taxes if they have under 10 transactions. Active traders? 40+ hours. Professional help costs $225-$450. That’s cheaper than an audit.

Common Mistakes That Trigger Audits

The IRS has data on what goes wrong. Here’s what they’re flagging:

• Failing to report airdrops - 32% of crypto audits start here.
• Misclassifying staking rewards - Treating them as capital gains instead of income.
• Forgetting hard forks - Receiving new coins from a chain split is income.
• Not documenting wallet transfers - Losing cost basis = assumed $0 purchase price.
• Answering “No” to the digital asset question - This is fraud. The IRS knows who traded.

Average penalty for a single error? $1,850. For multiple errors? Often $5,000+. And interest piles up fast.

What You Should Do Right Now

If you’re filing 2025 taxes:

1. Collect every transaction - From every exchange, wallet, and DeFi platform.
2. Use crypto tax software - Import all your data. Let it do the math.
3. Verify cost basis - Double-check every buy price. If you can’t find it, estimate with historical price data from CoinMarketCap or CoinGecko.
4. Answer “Yes” on Form 1040 - No exceptions.
5. Report all income - Staking, airdrops, payments - all count.
6. Keep records for 7 years - The IRS can audit crypto returns for up to 7 years.

And if you didn’t report crypto in past years? Don’t panic. The IRS has a voluntary disclosure program. File amended returns with Form 1040-X. It’s better than waiting for them to find you.

What’s Coming in 2026 and Beyond

By 2026, exchanges will start reporting cost basis. That’ll help - but only for centralized platforms. DeFi will still be a black box. The IRS is also testing blockchain analysis tools that can trace transactions across wallets and exchanges. They’re building a map of crypto activity - and they’re not stopping.

Staking rewards may get clearer tax rules by mid-2026. Right now, the IRS hasn’t confirmed if they’re income or capital gains. But they’re reviewing the Southerland v. IRS case - and the outcome could change everything.

The bottom line? Crypto tax compliance isn’t optional. It’s not a gray area. It’s a legal requirement. And the IRS is now equipped to enforce it - with data, tools, and staff. The question isn’t whether you’ll get caught. It’s whether you’re ready when they come.