10 Essential Crypto Tax Facts to Know Before Filing in 2026

Understanding the Basics of Crypto Taxes

Cryptocurrencies have introduced a new level of complexity to personal finance, particularly when it comes to taxation. The rules surrounding crypto investments are still evolving, and many individuals find themselves navigating uncharted territory. To ensure compliance and avoid potential financial pitfalls, it's essential to understand how your crypto activities might impact your tax obligations.

Digital Assets Are Subject to Taxes

One of the most common mistakes people make is not recognizing that digital assets are subject to taxation. According to Chad D. Cummings, Esq., a corporate and tax attorney, many individuals wrongly assume that crypto is exempt from taxes due to its decentralized nature or because it remains in an online wallet. This misunderstanding can lead to serious consequences if not addressed properly.

Tracking Your Cost Basis

Another frequent error is failing to track the cost basis accurately. The cost basis refers to the original value of a cryptocurrency asset when you bought it, including any fees or commissions paid during the transaction. This becomes especially important when assets are transferred across platforms or wallets, as it can obscure the original acquisition date and value.

When You’ll Be Taxed

Purchasing and holding cryptocurrency is not a taxable event on its own. However, taxes come into play when a crypto transaction results in the realization of gain or loss. This includes:

• Selling cryptocurrency for fiat currency
• Trading one type of cryptocurrency for another
• Using cryptocurrency to purchase goods or services
• Receiving crypto as payment for services

In each of these scenarios, taxpayers must calculate their gain or loss based on the fair market value at the time of the transaction.

Tax Liability and Income Recognition

Tax liability is generally triggered only when the asset is sold, exchanged, or otherwise disposed of. However, certain activities like staking, mining, and airdrops do constitute income upon receipt and are taxed at ordinary income rates.

Cryptocurrency income must be reported the year it is received, regardless of the amount. Income earned through mining, staking, or airdrops is treated as ordinary income. It’s important to note that the IRS treats mining hobbyists differently from those operating a mining business. Additionally, crypto staking rewards are also considered gross income.

Buying Things With Crypto

When cryptocurrency is used to purchase goods or services, the IRS treats it as a barter transaction. This means that you will need to report a gain or loss on the difference between the fair market value of the crypto at the time of disposition and its basis. Even a small purchase, like a cup of coffee with Bitcoin, could result in a reportable capital gain or loss.

The IRS Will Now Track Exchanges and Wallets

For the 2025 tax year, there are significant changes coming. Nicholas Slettengren, founder of Count On Sheep, a crypto tax and accounting firm, notes that the IRS is increasing its scrutiny. Form 1099-DA is set to arrive in 2026, and wallet-level cost basis tracking is becoming a necessity. The IRS is also closely monitoring discrepancies more than ever before.

Deducting Crypto Losses

Taxpayers can deduct crypto investment losses if the losses are realized (you sold it or disposed of it). If you've had any capital gains, you can deduct your capital losses up to $1,500 for individuals or $3,000 for joint filers. However, accurate recordkeeping is crucial to substantiate these deductions.

Utilizing Crypto Tax Software

Given the complexity of crypto taxes, it's advisable to use specialized software. If you're using multiple crypto platforms, don't rely on best guesses. Instead, use tax software like Koinly or CoinLedger, pull in all your wallet and exchange data via API or CSV, and reconcile everything. This includes matching trades, transfers, and cost basis. For serious accuracy, consider consulting a blockchain accounting firm.

Keeping Up on Your Data

Maintaining proper records is vital for verifying all your crypto transactions for taxes. If proper records weren’t kept throughout the year, taxpayers should attempt to reconstruct data using exchange histories, blockchain explorers, and bank statements.

Potential Fines and Penalties

Failing to report your crypto, intentionally or not, can result in penalties up to 40%, plus interest. In serious cases, it can escalate to civil or even criminal charges. With exchanges sending data directly to the IRS via 1099-DA, flying under the radar isn’t an option anymore.

Crypto taxes are no longer a gray area, and you can’t afford to be careless with your taxes. Regulations are tightening, and the IRS is paying close attention. Staying informed and organized now can save you stress, penalties, and money come tax time.