It’s crypto tax season, and changing rules mean the devil is in the details

With the holidays over, everyone’s other favorite time of year is fast approaching: tax season. For crypto investors, this can bring its own set of unique headaches.

Changing rules and industry jargon can make reporting cryptocurrencies to the IRS time-consuming and arduous. For starters, the agency has its own understanding of what cryptocurrency is and is not – an understanding that can sometimes conflict with traders’ ideas about cryptocurrency.

When crypto ≠ currency

For the IRS“digital assets are considered property and not currency”.

This includes assets such as Bitcoin, Stablecoins and NFTs. As such, they are all subject to the capital gains rules. This means that crypto is taxed when it is received as payment for a transaction and when it is sold or exchanged.

It differs from more traditional forms of currency, such as the US dollar.

“If you use foreign exchange to purchase an asset, the transaction is not taxed until the asset is sold,” said Mark Luscombe, CPA and analyst at Wolters Kluwer Tax & Accounting.

But he added that if a cryptocurrency is used to purchase an asset, the buyer is taxed on the difference between the fair market value of the cryptocurrency at the time of the transaction and its cost basis in the cryptocurrency.

Crypto Tax Loss Harvesting

It’s not all bad news when it comes to cryptocurrency taxes.

Tax-loss harvesting occurs when investors “sell assets at a loss to offset gains and reduce their taxable income,” as TokenTax explains. If done correctly, it can reduce the tax burden on the filer.

What happens if a person wants to continue holding their crypto?

With traditional securities, what’s known as the “wash sale rule” prohibits selling a stock at a loss for tax gains, only to turn around and buy back that same stock (or something so similar that it is essentially the same thing) within 30 days.

Crypto, however, is not subject to the same wash sale rule. In fact, companies like MicroStrategy, which hold bitcoin on their balance sheets, have used this strategy on a large scale: selling large quantities of bitcoin in December, only to redemption a few days later.

Some tax professionals caution that while this may create artificial losses that may be advantageous for tax purposes, it should come with a “buyer beware” disclaimer.

“In my experience, crypto trading can move very quickly, and you can end up with a real loss if you sell low,” said Crystal Stranger, senior tax director and CEO of OpticTax. “This is probably a strategy best implemented by larger investors, or if you are unlucky enough to buy at a high point and the market drops significantly, but plan to stay long term.”

An evolving crypto-fiscal landscape

The IRS stepped in last year to initiate a tax change that could have resulted in higher taxes for some filers.

On December 31, 2024, the IRS postponed until December 2025, the “first in, first out” (FIFO) rule. Under FIFO, which would have been the default valuation method for assessing capital gains on centralized exchanges, older assets must be sold first. One of the drawbacks of this accounting method is that if the price of a crypto rises steadily, “selling the oldest ones first could result in a higher capital gain, which could lead to increased tax liabilities.” Coinbase said.

“In a bull market environment, this could have been disastrous for many taxpayers, as you would unwittingly sell the first asset purchased (which tends to have the lowest cost) first, while unknowingly maximizing your gains- values”, Shehan Chandrasekera CPA, Head of Tax Strategy at CoinTracker, wrote on X.

Several tax experts echoed this sentiment, noting that delaying the implementation of this rule gives exchanges time to adjust systems and implement this tracking change. As Chandrasekera posted that brokers were “not prepared to support” this change, and it would have left “no option other than to sell your (centralized financial) assets under FIFO starting 1/1/25.”

Complicating matters, OpticTax’s Stranger said the rules could change again before being implemented and that 2025 would likely be a big year for tax law changes.

Disputes around crypto taxes and what could change under Trump

Crypto executives and investors are pushing for a complete overhaul of the sector’s tax treatment under the new crypto-friendly administration.

In a November letter Addressed to President-elect Trump and Congress, the Blockchain Association said that “the tax treatment of digital assets is inconsistent and that proposed rules, such as the Broker Rule, could lead promising companies and projects in the sector to stranger “.

There are also disputes between the IRS and the crypto industry over how and when to tax crypto income from staking.

“There is currently dispute over whether additional crypto rewards for staking, the process of locking up your cryptocurrency in a wallet to help manage a blockchain, results in a taxable transaction,” said Luscombe, referring to a couple’s ongoing lawsuit against the IRS.

In the lawsuit, Jessica and Joshua Jarrett argue that “cryptocurrency tokens created through staking are new property and should not be treated as income.” according to a law firm McDermott, Will and Emery.

As Luscombe said, Trump could try to get the IRS (which could completely change course under his administration) to reassess its position on crypto.

“I mean, if he wants to be friendly to the crypto industry, one way to do that would be to resolve these cases,” Luscombe said.

Yaël Bizouati-Kennedy is a financial journalist who has written for Dow Jones, The Financial Times Group and Business Insider, among others.