Key takeaways
- Using privacy coins like Monero increases the burden of proof for taxpayers during audits.
- 2025 is predicted to be a particularly complicated year for reporting crypto taxes.
- The new 1099-D form requires matching self-reported data with exchange data.
- Tax forms reflect total sales proceeds, not actual gains or held amounts.
- Exchanges often do not report the cost basis for crypto transactions.
- IRS requires a shift from a universal to a wallet-by-wallet accounting method.
- Many individuals must recreate their entire transaction history for accurate reporting.
- Crypto holders must allocate their basis based on the specific wallet or exchange.
- The IRS’s new accounting method reduces tax flexibility for crypto transactions.
- Exchanges will soon be required to include cost basis information for tax reporting.
- Crypto transfers complicate tax reporting compared to traditional assets.
- Different accounting methods like FIFO and LIFO are still applicable for crypto taxes.
- Using HIFO can help defer taxes on crypto gains.
- Married individuals in the US can have up to $131,000 in long-term capital gains tax-free.
Guest intro
Laura Walter is the Founder and CPA of Crypto Tax Girl, the first tax firm in the US solely dedicated to crypto taxation. She previously worked at EY on the Global Mobility tax team, specializing in individual tax compliance for expats, before leaving during the 2017 crypto bull run to launch her firm. Since then, she has helped over 1,200 clients navigate complex crypto tax issues including DeFi, mining, staking, and NFTs.
The implications of using privacy coins
- Using privacy coins like Monero can increase the burden of proof during IRS audits.
- “If you were audited, the IRS sees that you were using these privacy coins like Monero, then there’s just a higher burden of proof on taxpayers.” – Laura Walter
- Privacy coins complicate tax reporting due to the lack of transaction history available for audits.
- “These get tricky because if you were audited, the IRS sees that you were using these privacy coins.” – Laura Walter
- All crypto transactions are taxable and reportable, regardless of where they occur.
- “Even if it’s not on the 1099-D, it’s still taxable, it’s still reportable.” – Laura Walter
- Understanding the implications of using privacy coins is crucial for tax compliance.
- Taxpayers must maintain thorough records to prove their cost basis when using privacy coins.
The complexity of crypto tax reporting in 2025
- 2025 is anticipated to be a complicated year for crypto tax reporting.
- “I think 2025 is set up to be one of the most complicated years for reporting crypto taxes.” – Laura Walter
- The new 1099-D form requires users to match their self-reported data with exchange data.
- “You have to match it up to this new 1099-D form.” – Laura Walter
- Calculating cost basis is complex due to new IRS requirements.
- “The IRS is requiring a move from a universal method to a wallet-by-wallet method of accounting.” – Laura Walter
- Many individuals will need to recreate their entire transaction history.
- “They need to calculate their cost basis for all years and recreate their history from the first time they got into crypto.” – Laura Walter
- The IRS’s new regulations will complicate tax calculations for many crypto holders.
- “It’s tricky, and a lot of people are running into issues with it.” – Laura Walter
The impact of IRS regulations on crypto transactions
- The IRS now requires crypto holders to allocate their basis based on the specific wallet or exchange.
- “You have to only look at the Bitcoin on Coinbase when determining what to sell.” – Laura Walter
- The wallet-by-wallet accounting method reduces tax flexibility for crypto transactions.
- “You have less flexibility with wallet-by-wallet accounting.” – Laura Walter
- Exchanges will be required to include cost basis information for tax reporting.
- “Exchanges are going to be required to include your cost basis.” – Laura Walter
- There is a possibility that exchanges will be required to share cost basis information internationally.
- “There’s a big policy discussion going on called CARF.” – Laura Walter
- The IRS’s change to wallet-by-wallet accounting may increase transparency.
- “It reminds me of Bitcoin where you can see a chain of custody for every coin.” – Laura Walter
Tax strategies and implications for crypto holders
- Using HIFO can help defer taxes on crypto gains.
- “Highest in first out will decrease your total tax the most.” – Laura Walter
- Married individuals in the US can have up to $131,000 in long-term capital gains tax-free.
- “You can have $131,000 of capital gains and pay 0% tax on it.” – Laura Walter
- Loss harvesting in crypto allows individuals to offset gains with losses.
- “Decreasing your gains at the end of the year is great if you use loss harvesting.” – Laura Walter
- Liquidations on leveraged positions in crypto are treated as capital losses.
- “Liquidations on leverage positions are treated as capital losses.” – Laura Walter
- Setting aside cash throughout the year for tax obligations is a prudent strategy.
- “Set aside cash throughout the year because crypto can be volatile.” – Laura Walter
The challenges of tracking crypto transactions
- The unique nature of crypto transfers complicates tax reporting.
- “Crypto is unique in that you can easily transfer, which complicates things.” – Laura Walter
- Different accounting methods like FIFO and LIFO are still applicable for crypto taxes.
- “It’s still applicable, and you can choose the method on Coinbase.” – Laura Walter
- Transferring crypto between wallets affects how cost basis is calculated.
- “You take the oldest one, look at the cost basis, and transfer it into Coinbase.” – Laura Walter
- Future tax reporting for crypto may simplify, but complexities will remain for off-exchange holdings.
- “Next year it’ll have cost basis, but you’ll still have to do some calculations.” – Laura Walter
- Using crypto tax software can help ensure accurate cost basis allocation.
- “I recommend using crypto tax software to compare numbers and ensure accuracy.” – Laura Walter
The tax implications of DeFi and decentralized exchanges
- Tracking DeFi transactions for tax purposes is complex due to the variety of transaction types.
- “The DeFi stuff is tricky, and there’s not specific guidance on how to treat this.” – Laura Walter
- Using crypto tax software or a crypto tax accountant is essential for heavy DeFi users.
- “I recommend using a crypto tax software or accountant if you have heavy DeFi use.” – Laura Walter
- Crypto transactions on decentralized exchanges are taxable events, even if outside the US.
- “These are still taxable and reportable on your return.” – Laura Walter
- Depositing crypto into prediction markets creates a taxable event.
- “When you deposit crypto into a market, you’re technically spending that crypto.” – Laura Walter
Tax treatment of mining and staking rewards
- Mining rewards are considered income and must be reported based on their value at the time of receipt.
- “Include your mining rewards as income on the day you receive them.” – Laura Walter
- Expenses related to mining can be deducted from mining income on tax returns.
- “All of those are deductible against your mining income.” – Laura Walter
- Staking rewards are also subject to income tax similar to mining rewards.
- “Staking rewards are subject to income tax.” – Laura Walter
- Staking rewards should not be taxed as income until they are sold due to volatility.
- “There’s a case arguing for staking rewards to be taxed when sold.” – Laura Walter
- There is potential for legislative changes regarding the taxation of mining and staking rewards.
- “The Parity Act and Loomis bill are fighting for changes in taxation.” – Laura Walter
The implications of the Digital Asset Parity Act
- The Digital Asset Parity Act aims to simplify crypto tax reporting by addressing major tax issues.
- “The intention is to make crypto tax reporting easier and cleaner.” – Laura Walter
- Staking and mining rewards would not be reportable until sold or after five years.
- “They’re trying to make it so that staking and mining are not reportable until sold.” – Laura Walter
- The de minimis exception complicates the use of crypto as a currency.
- “Using crypto as a currency is difficult due to the requirement to report small gains or losses.” – Laura Walter
- The proposed $200 de minimis exception allows small crypto transactions without reporting gains or losses.
- “You can use crypto as a currency without reporting small gains and losses.” – Laura Walter
- Charitable contributions in crypto should not require qualified appraisals.
- “Why do they need qualified appraisals for crypto donations?” – Laura Walter
Practical strategies for crypto tax compliance
- To simplify tax reporting for crypto, it’s advisable to minimize the number of wallets and exchanges used.
- “It will be easier at tax time if you have fewer wallets and exchanges.” – Laura Walter
- Subjecting crypto to wash sales would be detrimental for the industry.
- “Crypto being subject to wash sales would not be great.” – Laura Walter
- The IRS is increasing its compliance efforts regarding crypto reporting.
- “The IRS is increasing their crypto compliance efforts, audits, and letters.” – Laura Walter
- Setting aside cash throughout the year for tax obligations is a prudent strategy for crypto investors.
- “Set aside cash throughout the year because crypto can be volatile.” – Laura Walter
