It’s crypto tax season, and evolving rules mean the devil’s in the details

With the holidays over, everyone’s other favorite time of year is upon us: tax season. For crypto investors, this can bring its own special set of headaches. 

The sector’s evolving rules and jargon can make reporting crypto to the IRS time-consuming and arduous. For starters, the agency has its own understanding of what crypto is and isn’t — an understanding that can sometimes clash with traders’ ideas about cryptocurrency. 

When crypto ≠ currency 

For the IRS, “Digital assets are considered property, not currency.” 

That includes assets like bitcoin, ethereum, dogecoin, stablecoins, and NFTs. As such, they’re all subject to capital-gains rules. This means that crypto is taxed when it’s received as payment for a transaction, and when it’s sold or traded. 

It differs from more traditional forms of currency, like the US dollar. 

“If you use currency to purchase an asset, the transaction is not taxed until the asset is sold,” Mark Luscombe, a CPA and analyst for Wolters Kluwer Tax & Accounting, said. 

But he said that if cryptocurrency’s used to purchase an asset, the purchaser is taxed on the difference between the cryptocurrency’s fair market value at the time of the transaction and their cost basis in the cryptocurrency. 

Crypto tax-loss harvesting 

It’s not all bad news when it comes to crypto taxes. 

Tax-loss harvesting is when investors “sell assets at a loss to offset gains and lower their taxable income,” as TokenTax explains. If done correctly, this can reduce a filer’s tax burden.

What if a person wants to keep hodling their crypto?

With traditional securities, something dubbed the “wash-sale rule” prohibits selling a stock at a loss for tax gains, only to then turn around and buy that same stock (or something so similar it’s essentially the same) again within 30 days. 

Crypto, though, isn’t subject to the same wash-sale rule. In fact, companies like MicroStrategy, which hold bitcoin on their balance sheets, have employed this strategy at scale — selling large amounts of bitcoin in December only to repurchase it days later.

Some tax experts caution that while this can create artificial losses that can be beneficial for tax purposes, it should come with a “buyer beware” disclaimer.

“In my experience, trading crypto can move very quickly, and you can end up with a real loss if you happen to sell at the bottom,” Crystal Stranger, a senior tax director and the CEO of OpticTax, said. “It is probably a strategy best done by big investors, or if you happen to be unlucky enough to buy at a high point and the market goes way down, but you plan on hodling for the long term.”

An evolving crypto-tax landscape

The IRS swooped in just under the wire last year to kick the can on a tax change that could’ve resulted in higher taxes for some filers. 

On December 31, 2024, the IRS postponed until December 2025 the “first in, first out” (FIFO) rule. Under FIFO, which would’ve been the default valuation method for assessing capital gains on centralized exchanges, older assets are required to be sold first. One of the drawbacks of this accounting method is that if a crypto’s price has steadily increased, “selling the oldest ones first could result in a higher capital gain, which could lead to increased tax obligations,” Coinbase said.

“In a bull market environment, this could have been disastrous for many taxpayers because you’d be unintentionally selling the earliest purchased asset (which tends to have the lowest cost basis) first, while unknowingly maximizing your capital gains,” Shehan Chandrasekera, head of tax strategy at CoinTracker, wrote on X.

Several tax experts echoed this sentiment, noting that postponing the implementation of this rule gives exchanges time to adjust systems and implement this tracking change. As Chandrasekera posted, brokers were “not ready to support” this change, and it would have left “no option other than selling your [centralized finance] assets under FIFO starting 1/1/25.”

To complicate matters, OpticTax’s Stranger said that the rules may change again before they are implemented, and that 2025 is likely to be a big year for tax-law changes.

Litigation around crypto taxes, and what might change under Trump

Crypto execs and investors are pushing for a complete overhaul of the industry’s tax treatment under the incoming crypto-friendly administration. 

In a November letter addressed to President-elect Trump and Congress, the Blockchain Association said that the “tax treatment of digital assets is irregular and proposed rules, such as the Broker Rule, may drive promising companies and projects of the industry offshore entirely.”

There are also disputes between the IRS and the crypto industry about how and when to tax crypto earnings from staking.

“There is currently litigation over whether rewards of additional crypto for staking, the process of locking up your cryptocurrency in a wallet to help run a blockchain, results in a taxable transaction,” Luscombe said, referring to one couple’s ongoing lawsuit against the IRS.

In the suit, Jessica and Joshua Jarrett argue that “cryptocurrency tokens created through staking are new property and should not be treated as income,” according to law firm McDermott Will & Emery.

As Luscombe said, Trump could try to get the IRS (which might entirely change course under his admin) to reassess its position on crypto. 

“If he’s going to be friendly to the crypto industry, one way to do that would be to resolve these cases,” Luscombe said.

Yaël Bizouati-Kennedy is a financial journalist who’s written for Dow Jones, The Financial Times Group, and Business Insider, among others.