Cryptocurrency is no longer just a side hustle or a speculative gamble. It’s a real part of business strategy, investment planning, and sometimes even payroll. But with new opportunities come new rules, especially when the IRS gets involved.
Understanding crypto taxes doesn’t mean becoming a blockchain expert. You just need to know what the IRS looks for, which activities trigger tax events, and how to keep good records. This guide breaks down what matters, what to watch for, and how to stay compliant without losing your mind during tax season.
Why are crypto taxes so confusing and why should business owners pay attention?
The crypto world changes fast. Prices fluctuate. New coins show up. Platforms evolve.
But the IRS has stayed consistent about one thing. They treat cryptocurrency as property, not currency. That means your crypto transactions could trigger taxes just like selling a stock or a piece of real estate.
Business owners who use or hold crypto need to know where those taxable moments happen. The rules might feel murky, but they’re not optional.
When does crypto actually matter for taxes?
The IRS tracks cryptocurrency activity because they view it as an asset. That turns everyday actions into possible tax events. Selling, trading, or even using crypto in your business could require tax reporting.
Here’s where crypto tax issues usually show up:
- Selling crypto for dollars
- Swapping one coin for another
- Accepting crypto as payment
- Earning crypto through mining or staking
Each of these can trigger taxes. The key is to understand how and when those rules apply.
How does the IRS define cryptocurrency and how is it taxed?
It doesn’t matter if you’re using Bitcoin or something more obscure. To the IRS, all cryptocurrency is property. That means crypto is taxed based on gains and losses, just like a stock.
Two main rules apply:
- Gains are taxable events.
When you sell or spend crypto, the IRS wants to know if you made a profit. That includes trading one token for another or buying something with crypto. - Holding period affects your rate.
Keep crypto for a year or less, and any gain is taxed as regular income. Hold it longer, and you may qualify for lower long-term capital gains rates.
The IRS wants to know the value at the time of the transaction and how long you held it before making a move.
Where could you owe taxes without realizing it?
Crypto activity goes beyond buying and selling. Some situations create tax consequences that people often overlook.
Here are some common examples:
- Selling crypto for cash.
If you bought crypto for $1,000 and sold it for $1,500, the $500 gain is taxable. - Swapping one crypto for another.
Exchanging Bitcoin for Ethereum counts as a sale, and the gain is taxable. - Getting paid in crypto.
If a client pays you in crypto, record the fair market value in dollars on the day you receive it. That counts as business income. - Mining or staking rewards.
These are considered income the moment they hit your wallet. If you’re running a mining operation as a business, self-employment taxes may apply.
These events can sneak up on you. Keeping good records helps you avoid surprises later.
What if you’re just investing for yourself?
Individual investors have simpler rules than businesses, but taxes still apply. The IRS treats crypto investments a lot like stocks.
Here’s what you need to know:
- Capital gains still apply.
You pay tax when you sell crypto for more than you paid. You can use capital losses to offset gains or reduce taxable income in some cases. - Loss reporting must be accurate.
The IRS expects honest reporting of both gains and losses. Trying to get creative can backfire. - Just holding crypto doesn’t trigger taxes.
You don’t pay anything just for owning crypto. A taxable event only occurs when you make a transaction.
Keeping your transactions simple doesn’t mean you can ignore tracking. You still need to know your purchase dates, sale dates, and values.
How do crypto taxes work when your business accepts or uses it?
Using crypto in your business adds complexity. The IRS treats business-related crypto activities with the same seriousness as any other income or expense.
These are the areas to pay attention to:
- Accepting crypto as payment counts as revenue.
You must report the fair market value in dollars on the date you received it. - Paying vendors or employees in crypto is allowed.
You can deduct these expenses as long as you document the value on the date of payment. - Frequent transactions require solid records.
If you use crypto regularly or treat it as inventory, make sure your accounting system can track every detail. - Crypto-related expenses can be deducted.
Business use of crypto creates valid deductions, but you need documentation of market value, purpose, and transaction dates.
For businesses, sloppy recordkeeping leads to big problems. Staying organized from the start saves you stress later.
Do you use foreign exchanges or wallets?
Using foreign platforms or wallets to hold crypto can trigger additional IRS forms. The rules are strict, and the penalties for missing them can be steep.
These are the two main forms to know:
- FBAR (Report of Foreign Bank and Financial Accounts)
If your foreign-held crypto accounts exceed certain thresholds, you must file this. - FATCA (Foreign Account Tax Compliance Act)
Larger foreign holdings could require more disclosures.
The IRS is paying attention to crypto held offshore. If you use international exchanges, assume extra paperwork will follow.
What records should you keep and for how long?
The IRS wants details, and you’ll want them too when it’s time to file. Clean records make filing easier and give you peace of mind if questions come up later.
Here’s what to track:
- Purchase and sale dates
- Fair market value at the time of each transaction
- Amounts received or spent in U.S. dollars
- Cost basis and proceeds
- Exchange statements and wallet transaction histories
Store this information for at least three to seven years. Digital or paper is fine, just make sure it’s complete and easy to access.
Which tax forms are involved in reporting crypto?
Several IRS forms may apply depending on your crypto activity. Here’s what you’ll likely use:
- Form 8949
Used to report each sale, trade, or exchange of crypto. - Schedule D
Summarizes your capital gains and losses. - Schedule C
Used by sole proprietors and businesses for income from mining or staking. - Form 1040
Your main tax return includes a checkbox asking if you received or sold crypto.
Knowing which forms to file helps you avoid mistakes and reduces the risk of audits.
The bottom line
You don’t have to feel lost every time crypto tax season rolls around. A few habits and tools can keep things under control.
Here’s how to stay on track:
- Keep clean, current records of all crypto activity
- Stay informed as IRS guidance evolves
- Use software or work with a tax pro who understands crypto
The right system makes all the difference. With good documentation and support, crypto taxes become manageable.
DiMercurio Advisors helps business owners and investors set up the right systems, understand their obligations, and plan ahead. Whether you’re experimenting with crypto or fully integrating it into your business, we can help you stay compliant and confident.
