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Selling or trading cryptocurrencies won't trigger a tax audit, but you still need to report your crypto gains or losses to file an accurate tax return. If you underreport your income—including taxable crypto gains—and are audited, you may have to make up the difference in required income taxes, plus penalties and interest.
Why You Need to Report Crypto Sales to the IRS
You need to report the sale of crypto to the IRS because the IRS treats crypto as property. When you sell crypto, the difference between the sale price and the asset's adjusted cost basis (often, the price you paid plus fees) will be your gains or losses. You need to report these to file an accurate tax return.
The resulting capital gains taxes you'll pay can depend on your overall taxable income for the year and whether you held the crypto for at least a year before selling. Crypto profits are taxed differently depending on how long you held on to the asset before realizing a gain. If you lost money on your crypto, you can deduct the losses from other capital gains and up to $3,000 of ordinary income each year.
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Other Crypto Transactions You Need to Report to the IRS
The IRS asks taxpayers, "At any time during [the year], did you receive, sell, exchange or otherwise dispose of any financial interest in any virtual currency?" You must answer the question accurately or risk legal consequences.
The IRS has said you don't need to check yes if you only bought, held or transferred cryptos in or between your crypto wallets and accounts. You also might not need to report gifting crypto to someone else or donating crypto to an eligible nonprofit.
But you may need to check yes and report your associated gains or losses from a crypto transaction if you sold crypto or:
- Used crypto to buy a product or service
- Sold a product or service for crypto
- Exchanged one cryptocurrency for another
- Earned crypto via mining, staking, lending or an airdrop
In short, when you use or exchange crypto, you're essentially selling it in exchange for the product, service, crypto or dollars you receive. That means you need to report the difference between its "sale price" at that point and its adjusted cost basis.
How to Report Crypto Transactions to the IRS
You'll report many of the crypto transactions on IRS Form 8949 and summarize the capital gains and losses on your Schedule D form. But some transactions, such as non-business income from mining or staking crypto, get reported as additional income on your Schedule 1. Figuring out the numbers can be difficult, though.
Some crypto exchanges send a Form 1099-MISC if you earned over $600 in miscellaneous income, such as staking rewards and referral fees. However, the crypto exchanges won't be required to create and send Forms 1099-B, for your gains and losses from trades on the platform, until the 2023 tax year.
If you used a crypto exchange to complete your transactions, you might be able to download a list of your records or create tax reports that you can use to prepare your tax return or upload into your tax preparation software.
Some crypto wallets also let you download a record of transactions, but understanding your cost basis and accurately reporting your gains and losses can quickly get confusing—especially if you have multiple wallets and frequently trade cryptos.
A number of services have sprung up that you can use to track your crypto transactions and create tax reports. Some can connect to your accounts at exchanges and crypto wallets to import transactions. There may be a fee to use the software, and you'll want to make sure that the service supports the exchanges and wallets you used.
Prepare and File an Accurate Tax Return
Crypto exchanges might not report your gains or losses to the IRS, which is why failing to report your crypto sales won't automatically trigger an audit or IRS notice. However, that doesn't give you permission to be careless in your tax filings. The IRS has tools to track crypto transactions, and you still need to report all the required crypto transactions and resulting gains or losses to file an accurate tax return. If you underreport your income, you risk having to pay penalties and interest later.