New IRS policies raise the stakes for crypto taxation

Cryptocurrency (crypto) has surged into the mainstream, embraced by both retail and institutional investors, and utilized for domestic and cross-border transactions. IRS tax policy governing crypto has often not kept pace but its grip is now tightening. Upcoming regulations will dramatically alter how crypto is reported for tax purposes in the years ahead.

Understanding and preparing for these changes means avoiding costly surprises. Here’s what you need to know and why now’s the time to prepare.

First, what’s crypto?

Unlike cash or credit cards, crypto is:

• Virtual: Entirely digital, not tangible
• Encrypted: Secured through cryptography
• Decentralized: Not issued or managed by a governmental or central bank

Most crypto activity happens on blockchain, a decentralized ledger that records transactions securely and transparently. It ensures data is immutable, meaning it can’t be changed. Most crypto activity today is trading and investing, with some usage for purchases.

Types of digital assets

• Crypto
• Non-fungible tokens (NFTs): Unique digital items (e.g., art, a government ID or virtual games)
• Stablecoins: Pegged to the U.S. dollar or other assets
• Security tokens: Tokenized securities like stocks, bonds, real estate, property or equipment

A timeline of the IRS’s increasing focus on crypto

IRS guidance on crypto taxation has been limited. Many taxpayers didn’t know how to report their transactions, and millions went unreported. Even though reporting requirements have technically existed for 16 years, the IRS has only recently prioritized enforcement.

The IRS enhanced its oversight in 2020 by adding a checkbox to Form 1040, requesting confirmation of any virtual currency transactions. Since then, the question has been refined to be more specific, and the Form 1040 instructions now provide examples of what qualifies. Notably, simply holding or transferring crypto between personal wallets does not trigger a taxable event and allows for a “no” response.

In 2024, the IRS issued new regulations (IR-2024-178) requiring custodial brokers to report sales and exchanges of digital assets starting in 2025. This mirrors the way brokers already report stock transactions, meant to reduce noncompliance while relieving taxpayers of some tracking burdens.

Why it matters: Individuals that trade through custodial brokers will receive tax forms like those for stock transactions. Traders using non-custodial platforms must take responsibility for recordkeeping and IRS reporting.

What’s next?

The IRS has signaled more guidance is on the way, especially for non-custodial brokers. But the fundamentals are already clear: crypto is taxable because it’s classified as property, not currency.

That means any transaction — earning, selling, trading or even using crypto to make a purchase — can create a taxable event.

What’s new for 2025 and beyond?

The new broker reporting rules bring several important changes:

• Form 1099-DA: This will be issued in 2026 for 2025 crypto transactions and resemble Form 1099-B for stocks. Cost basis reporting for 2025 will be optional, potentially complicating filings for taxpayers with limited transaction records.
• No de minimis threshold: All crypto transactions, regardless of size, must be reported.
• Failure to receive Form 1099-DA does not excuse reporting.
• Backup withholding: This is not required in 2025–2026 and its limited application will begin in 2027.
• Transitional relief: This is available in 2025 if the taxpayer shows good-faith compliance efforts.
• Real estate: Beginning in 2026, brokers must report crypto used in real estate transactions.
• Other 1099 changes (under OBBBA):
  • 1099-K: Threshold of $20,000 and 200 transactions starting 2025
  • 1099-MISC and 1099-NEC: Threshold of $2,000 starting 2026, indexed for inflation

Why it matters: Expect more paperwork. Failing to receive a form does not protect you. The IRS will still expect complete reporting.

Other recent legislation

• DeFi reporting (March 2025): Treasury rules requiring decentralized brokers to report transactions were deemed unworkable, but centralized exchanges remain responsible. Taxpayers must still report all activity.
• GENIUS Act (July 2025): Stablecoin issuers must maintain 1:1 U.S. dollar reserves. Intended to lower transfer costs and card fees, with anti–money laundering protections.
• CLARITY Act (pending): This splits oversight between the SEC and CFTC, depending on whether an asset is treated as a security or commodity.
• CBDC Anti-Surveillance State Act (pending): This would prohibit the Federal Reserve from issuing a central bank digital currency directly to the public.

Tax reporting basics

• Capital gains and losses: Reported on Schedule D and Form 8949, like stocks and bonds. The IRS distinguishes between short-term and long-term capital gains.
• Ordinary income: Receiving crypto as payment through mining, staking or airdrops is considered income at fair market value, taxed at the individual’s ordinary income rate (Schedule 1 or Schedule C if business-related). Due to crypto’s volatile price fluctuations, income taxation could occur at well above the asset’s future value.
• Accounting methods: Starting January 1, 2026, all crypto must be reported using the specific identification method on a wallet-by-wallet basis. Grouping wallets will no longer be allowed.
• Realized gains: Unlike traditional assets where gains are recognized at sale, crypto gains/losses are realized anytime the taxpayer disposes of the holdings — selling, exchanging or even spending on goods and services.

Why it matters: The recordkeeping burden is increasing. If the taxpayer’s not already tracking wallet-level details, 2026 reporting requirements could be overwhelming.

Examples in practice

Capital gains/losses include:

• Selling crypto investments
• Exchanging one crypto for another
• Selling crypto for fiat currency
• Using crypto to buy goods or services (treated as a sale)

Ordinary income includes:

• Payment for goods/services: Fair market value of crypto at receipt is considered income. Future gains/losses are taxed as capital gains.
• Staking: Passive income from locking tokens on a blockchain
• Mining: Often treated as a business activity, with related expenses being deductible
• Airdrops: Tokens distributed as part of promotions or marketing
• Forks: A “hard fork” that creates a new cryptocurrency triggers taxable income.

Non-taxable transactions (records still required):

• Gifting crypto (still subject to estate and gift taxation)
• Transfers between personal wallets
• Buying and holding in a personal account

Why it matters: Even “non-taxable” activity needs documentation. The IRS expects wallet addresses and timestamps to prove your position.

Miscellaneous considerations

• Investments in crypto ETFs are investments in regulated securities, not crypto itself.
• Wash sale rules apply to crypto ETFs, but not to direct crypto holdings (for now).
• Report of Foreign Bank and Financial Accounts (FBAR): Foreign crypto isn’t currently subject to FBAR reporting, but hybrid accounts and assets held on foreign exchanges are.

How Sikich can help

At Sikich, we work with clients every day to untangle the complexity of digital asset reporting. That means helping you navigate the new reporting rules and forms, and spotting planning opportunities to better manage your tax exposure. Just as importantly, we keep you ahead of what’s coming next — from IRS guidance to fast-moving legislation — so you can focus on strategy instead of scrambling to catch up.

The bottom line: Don’t wait until 2026 to organize your records. The earlier you put the right systems in place, the more control you’ll have over your tax position. If you’d like to understand how these changes affect you or your business, contact us. Our tax team is here to help you stay compliant and ahead of the curve.

About our authors

Ken Simon, CPA, JD, is a Tax Director on the Sikich national estate and trust team. He has extensive experience with high-net-worth individuals, families and their closely held businesses, as well as all varieties of estates, gifts, trusts, related charitable entities and multi-generational tax planning. His background also includes international estate and trust planning, cross-border transactions, and income and estate tax treaties.

Raven Maretti, CPA, is a manager of tax services at Sikich. In her role, Raven provides tax consulting, planning, reporting, and filing solutions to business clients and individuals. Her areas of expertise include various professional services and manufacturing companies.

Daniel Lutz, CPA, MPA, has nearly 15 years of experience as a tax principal who advises private companies, tax-exempt organizations and high-net-worth families on tax strategies, helping them to make sound financial decisions. Dan provides tax compliance, planning, consulting and related wealth management services. He also has expertise in trust and gift taxation.