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Crypto Law/Level I · What crypto is in law/1.3 Who's who/Lesson 3

The IRS and tax authorities

Why the tax collector is the agency most crypto holders actually deal with, what it already learns about your trades, and how tax offices abroad are catching up.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Buying with dollars and holding is not taxable, and the Form 1040 instructions let you answer ‘No’ to the digital-asset question if that is all you did; holding over one year then reaches the 2026 0% rate up to $49,450 taxable income single.
  2. Harvest losses freely: with no wash-sale rule for spot crypto under current law, a loss can be realised and the coin rebought at once, offsetting gains plus $3,000 of ordinary income; H.R. 10357 would end this, so check its status.
  3. File free: IRS Free File serves those with AGI of $89,000 or less, and Free File Fillable Forms have no income limit; reconcile each Form 1099-DA on Form 8949, correcting missing basis rather than paying tax on gross proceeds.
  4. Donating coins held over one year to a charity deducts their full market value with no capital-gains tax; deductions over $5,000 need a qualified appraisal and Form 8283, as CCA 202302012 confirmed, or the deduction is lost.

MaterialsThe IRS ‘Digital Assets’ page (irs.gov/filing/digital-assets)The digital asset question near the top of IRS Form 1040Any Form 1099-DA or annual tax statement your exchange or broker sends youIRS Notice 2014-21

Wonder

  1. Does the IRS care whether my token is a security or a commodity?
  2. How would the IRS know about my crypto if I never report it?
  3. Do other countries’ tax offices get information about crypto accounts too?

Explore

  1. The Internal Revenue Service (IRS), part of the US Treasury Department, collects federal taxes and enforces the Internal Revenue Code. Unlike the SEC or the CFTC, it does not ask whether a token is a security or a commodity; it asks whether you had income or a gain. Since Notice 2014-21, the IRS has treated virtual currency as property, not currency, so the general tax rules for property apply (lesson 2.1.1). Its current guidance uses the broader term ‘digital assets’, which covers stablecoins and NFTs as well.
  2. Property treatment means that selling, swapping or spending a coin can produce a taxable gain or loss, and receiving tokens as pay or rewards is usually income; Level 2 covers the mechanics (lessons 2.1.2 and 2.1.3). For staking, Revenue Ruling 2023-14 says a cash-method taxpayer includes the rewards in income, at fair market value, in the year they gain ‘dominion and control’, meaning the ability to sell or move them. Every Form 1040 asks, yes or no, whether during the year you received digital assets as a reward or payment, or sold, exchanged or otherwise disposed of any.
  3. The IRS also gets information from others. A new form, Form 1099-DA, requires brokers to report gross proceeds of digital asset sales for transactions on or after 1 January 2025, and cost basis, the amount you paid, for certain transactions on or after 1 January 2026. You get a copy and so does the IRS. A rule that would have extended this broker reporting to some decentralised-finance front ends was overturned by Congress under the Congressional Review Act in Public Law 119-5, enacted on 10 April 2025. Trades with no broker remain taxable; they simply are not reported by a third party.
  4. When figures do not match, the IRS can send notices, audit a return and charge interest and penalties. Its Criminal Investigation division (IRS-CI) handles tax-evasion and other financial-crime cases. Because most public blockchains keep a permanent record, a trade made years ago can still be traced once a wallet is linked to a name, for example through an exchange account (lesson 1.1.5). The tax risk does not depend on the SEC or CFTC debates above: a token can be unregulated as an investment and still fully taxable.
  5. States add their own layer: most states with an income tax start from federal figures, so a federal gain usually flows into the state return. Abroad, tax offices are building similar pipelines. In the European Union, the directive known as DAC8 requires crypto-asset service providers to collect data on EU-resident users from 1 January 2026, with the first exchanges between national tax authorities due by 30 September 2027. DAC8 is based on the OECD’s Crypto-Asset Reporting Framework (CARF), published in July 2023, which other countries are also implementing.
  6. The practical point is that tax reporting is the part of crypto law most holders meet first, and it rewards good records. Broker forms may show proceeds without an accurate cost basis, especially for coins moved in from another wallet or platform, so the reported figure can overstate a gain. A practical check: log into each exchange used during the year, download the annual tax documents and full transaction history, and compare the totals with your own records before a return is filed. This is general education; a qualified tax preparer applies the rules to a particular situation.

Key facts

  • IRS Notice 2014-21 treats virtual currency as property, not currency, for US federal tax.
  • Form 1040 asks every filer a yes-or-no question about receiving, selling, exchanging or otherwise disposing of digital assets.
  • Brokers report gross proceeds on Form 1099-DA for digital asset transactions on or after 1 January 2025, and cost basis for certain transactions on or after 1 January 2026.
  • Revenue Ruling 2023-14 says staking rewards are included in a cash-method taxpayer’s income when the taxpayer gains dominion and control over them.
  • Public Law 119-5, enacted on 10 April 2025, overturned the IRS rule on gross proceeds reporting by certain decentralised-finance brokers.
  • Under the EU’s DAC8, crypto-asset service providers collect data on EU-resident users from 1 January 2026, with first exchanges between tax authorities by 30 September 2027.

Exercise nine, six, three, one

9CollectList up to 9 crypto events from your own year or a real example, such as buying, selling, swapping, spending, receiving pay, staking rewards, airdrops, or moving coins between your own wallets (some lists are shorter).
6ClusterSort them into 6 categories: sales for cash, swaps, spending, income received, transfers between your own wallets, and events you are unsure about.
3DistillReduce the 6 to 3 groups: likely reported to the IRS by a broker, likely taxable but not reported by anyone else, and probably not a taxable event.
1CrystallizeWrite 1 sentence explaining, in your own words, why a token’s legal label for the SEC or the CFTC does not decide whether you owe tax on it.

Fact check

Dates, figures and claims checked against the published sources listed below.

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