How-to guide: How to address tax and accounting considerations when using cryptocurrency (USA) 

Introduction

This guide will assist in understanding how to address tax and accounting considerations related to cryptocurrency use in the United States. Although cryptocurrency is a relatively recent development, the Internal Revenue Service (IRS) is actively working to ensure compliance with cryptocurrency tax regulations. It is aimed at in-house counsel, private practice lawyers, and compliance personnel.

This guide covers:

1. Is dealing in cryptocurrency a taxable event?
2. Accounting considerations

This guide can be used in conjunction with the following How-to guides: Understanding the use of cryptocurrency for payments in business, Implementing a policy to avoid cryptocurrency-related scams in business; Checklists: Key steps to mitigate risks associated with using cryptocurrency and Quick views: Cryptocurrency and US tax laws; Cryptocurrency regulation and enforcement, and Introduction to cryptocurrency and how it works.

The focus of this guide is on federal taxation. Only a few states have addressed cryptocurrency in their tax regimens, primarily focusing on sales taxation.

The legal and regulatory regimes regarding cryptocurrency are likely to undergo significant changes in light of the re-election of Donald Trump as President. President-elect Trump has repeatedly expressed his enthusiasm for cryptocurrency, vowing to turn the United States into a ‘cryptocurrency superpower.’ The exact steps that may be taken towards that goal are not certain. It is crucial that investors or anyone involved in any way with cryptocurrency keep themselves apprised of new regulatory and legislative rules that may develop in the coming months.

Section 1 – Is dealing in cryptocurrency a taxable event?

The first step in analyzing the tax consequences of a cryptocurrency transaction is to determine whether buying, selling, or exchanging cryptocurrency is a taxable event.

1.1. Ordinary income

1.1.1 Virtual currency is treated as property

According to the IRS (see section 1.1.3), cryptocurrency or, as it is often called, virtual currency, is treated as property for federal tax purposes. This classification means that the same tax principles that apply to transactions involving property, such as stocks or real estate, also apply to transactions involving virtual currency.

1.1.2 General tax principles apply

As noted at section 1.1.1 above, the same general tax rules for property transactions also apply to virtual currency. This means that when virtual currency is received in exchange for goods or services, it is considered as ordinary income and must be reported on the taxpayer’s income tax return. For example, if a taxpayer receives virtual currency as a payment for goods or services, they must include the fair market value of the virtual currency, measured in US dollars, in their gross income as of the date they received it. This fair market value then becomes the basis for calculating any future gain or loss.

The fair market value (ie, typically the trading price on the date of the transaction) of virtual currency is determined by converting it to US dollars at the exchange rate If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand (ie, what a buyer is willing to pay). The fair market value of the virtual currency is determined by converting the virtual currency into US dollars (or into another real currency which in turn can be converted into US dollars) at the exchange rate, in a reasonable manner that is consistently applied. See IRS Notice 2014-21.

Taxpayers are required to maintain adequate records to prove the value of the virtual currency used in their transactions. Cryptocurrency assets must be recorded at their cost when initially acquired, known as the cost basis. This serves as the reference point for future accounting and tax calculations. If virtual currency is sold or exchanged, any gains or losses must be calculated and reported. These principles ensure that virtual currencies are treated consistently with other forms of property under US tax law.

All US taxpayers must disclose on their federal income tax forms if they have engaged in any transactions involving digital assets during the tax year. For more details, visit the IRS webpage on digital assets.

1.1.3 Notice 2014–21 IRS Virtual Currency guidance

In 2014, the IRS issued Notice 2014-21, providing important guidance on how to tax virtual currencies. This notice marked the IRS’s first substantial attempt to address the tax implications of cryptocurrencies, a rapidly growing and evolving part of the financial landscape. The guidance clarified how virtual currencies should be treated for federal tax purposes, providing taxpayers with more certainty in their financial and tax planning. For further guidance see Frequently asked questions on virtual currency transactions in Notice 2014-21 (FAQs).

Definition and classification of virtual currency

Notice 2014-21 defines virtual currency as a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. The notice states that virtual currency is treated as property, not currency, for federal tax purposes. This classification affects how virtual currency transactions are calculated and reported for tax purposes.

Tax treatment

The Notice outlines that general tax principles applicable to property transactions apply to transactions using virtual currency in the ways listed below.

• Income from services: if a taxpayer (whether an individual, a corporation, or other taxed entity) receives virtual currency as payment for goods or services (not as an employee), the fair market value of the virtual currency, measured in US dollars as of the date of receipt, must be included in gross income. For example, if a freelance consultant is paid in Bitcoin, the fair market value of the Bitcoin at the time of receipt is considered taxable income (in the same way as a payment made in cash would be). This fair market value would be reported on the appropriate income tax return (Form 1040 for individuals or Form 1120 for C-corporations) or informational return (Form 1065 for partnerships).
• Capital gains and losses: when a taxpayer sells or exchanges virtual currency, they must recognize any capital gain or loss. This gain or loss is calculated by comparing the fair market value of the virtual currency at the time of receipt (the original cost) and the time of sale or exchange. For example, if an individual purchases Bitcoin for $5,000 and later sells it for $10,000, they would recognize a capital gain of $5,000. That gain would be reported on the taxpayer’s Form 8949, Sales and other Dispositions of Capital Assets.

Specific clarifications

• Mining income: taxpayers who mine virtual currency must include the fair market value of the mined currency in their gross income as of the date of receipt. This income is subject to self-employment tax for individual miners. Mining done on behalf of an employer is not regarded as self-employment income but will, however, be treated as income subject to federal income tax.

• Charitable contributions: if a taxpayer donates virtual currency to a charitable organization, the fair market value of the virtual currency at the time of the donation is generally deductible for the taxpayer-donor, subject to the rules for charitable contributions of property. See also section 1.3.4 below.  

  A charity that receives a donation of cryptocurrency must report it like any other valuable asset donation. If the donation is worth more than $500, it must be reported on Form 8283. If the charity sells the donated cryptocurrency within three years of receipt, the sale must be reported to the IRS on Form 8282.

Reporting and recordkeeping

Notice 2014-21 emphasizes the importance of accurate reporting. Taxpayers must keep records of all virtual currency transactions, including the transaction amount, the value of the virtual currency at the time of the transaction, and the purpose of the transaction (eg, the type of services or products provided).

Payments made with virtual currency are subject to the same information reporting as any other property payments. For example, payments of $600 or more made to independent contractors using virtual currency must be reported on Form 1099-MISC.

Failure to report income and pay the resulting tax from virtual currency transactions, or failure to pay employment taxes on wages paid in virtual currency, could result in penalties and interest. See Penalties on the IRS website.

1.2 Capital gain

1.2.1 When selling virtual currency, recognize any capital gain or loss on the sale

When taxpayers sell or exchange virtual currency, the IRS treats the transaction as generating either a capital gain or loss. The capital gain or loss is the difference between the fair market value of the currency at the time of sale or exchange and the taxpayer’s adjusted basis – the cost to the taxpayer of acquiring the asset, adjusted for factors affecting its value. If the fair market value exceeds the adjusted basis, the taxpayer has a capital gain; if the adjusted basis exceeds the fair market value, the taxpayer has a capital loss. This gain or loss must be reported on the taxpayer’s income tax return.

To calculate the gain or loss when virtual currency is sold for real currency, taxpayers need to determine the adjusted basis of the virtual currency. The adjusted basis is generally the amount the taxpayer paid to acquire the currency, including any fees or commissions. If the taxpayer received the virtual currency as payment for goods or services, the basis is the fair market value of the currency at the time it was received. The gain or loss is the difference between the sales price (fair market value in real currency at the time of sale) and the adjusted basis. For example, if a taxpayer purchased virtual currency for $1,000 and later sold it for $1,500, they would have a $500 capital gain.

1.2.2 How to determine gain or loss

The holding period of the virtual currency determines whether the gain or loss is short-term or long-term. If the taxpayer held the virtual currency for one year or less before selling or exchanging it, any gain or loss is considered short-term and is subject to taxation at the same rates as if the asset were ordinary income. If the taxpayer held the virtual currency for more than one year, any gain or loss is considered long-term and is subject to long-term capital gains tax rates, meaning that a taxpayer with an income of $48,350 or less would pay no capital gains tax, a taxpayer with an income of $48,351 to $533,400, would pay 15%, and a taxpayer with an income of $533,401 or more would pay 20%. The holding period starts on the day after the taxpayer acquires the virtual currency and ends on the day they sell or exchange it.

1.3 Movement of cryptocurrency assets

1.3.1 Do I have income if I provide someone with a service and that person pays me with virtual currency?

When you provide a service and receive virtual currency as payment, the IRS treats this as taxable income subject to the same income tax rates as other payments. The fair market value of the virtual currency on the date it is received must be included in your gross income. This means that if you are paid in any type of cryptocurrency, you need to determine its value in fiat currency (eg, US dollars) at the time of the transaction.

1.3.2 Cryptocurrency in a peer-to-peer transaction (not through an exchange)

Peer-to-peer (P2P) cryptocurrency transactions involve direct exchanges between individuals without intermediaries such as exchanges. These transactions also have significant tax implications. Both the buyer and the seller are responsible for reporting the transaction to their respective tax authorities.

For the seller, any capital gain or loss must be reported. This is calculated by subtracting the seller’s cost basis from the fair market value of the cryptocurrency at the time of the transaction. The buyer must establish the fair market value at the time of acquisition, which becomes their cost basis for any future transactions involving that cryptocurrency.

1.3.3 Cryptocurrency transactions through a broker

Currently, a transfer of cryptocurrency between wallets or between exchanges is not a taxable event, if ownership of the asset does not change. Such an exchange does not produce a capital gain or loss, and the mere act of transferring an asset’s location does not produce income. See IRS Publication 544, Sales and Other Dispositions of Assets.

New IRS regulations, issued on December 30, 2024, aimed to clarify tax reporting for decentralized finance (DeFi) platforms acting as digital asset ‘brokers.’ These rules specifically targeted ‘trading front-end services’ that facilitate digital asset sales, expanding on earlier guidance for custodial brokers. However, on April 10, 2025, Congress used the Congressional Review Act (CRA) to successfully block these DeFi-specific reporting regulations. This marks the first time the CRA has been used to disallow an IRS regulation, potentially setting a precedent for future legislative challenges to tax rules.

1.3.4 Calculation of a charitable contribution deduction when a taxpayer donates virtual currency

Donating virtual currency to a qualified charitable organization can provide significant tax benefits. The amount of the charitable contribution deduction is generally equal to the fair market value of the donated cryptocurrency at the time of the donation, provided the cryptocurrency has been held for more than one year. If the cryptocurrency has been held for one year or less, the deduction is limited to the lesser of the cryptocurrency’s fair market value or its cost basis.

To claim the charitable contribution deduction, the donor must obtain a written acknowledgment from the charitable organization that includes the donation amount and the date of the donation. For donations exceeding $500, IRS Form 8283 must be completed. If the donation exceeds $5,000, a qualified appraisal may be required unless the cryptocurrency is publicly traded.

Section 2 – Accounting considerations

2.1 Accounting standards

In the United States, the standards for accounting are the Generally Accepted Accounting Principles (GAAP). These principles are the default accounting standards commonly used by US-based companies. The GAAP is published and maintained by the Financial Accounting Standards Board (FASB), a private, non-profit organization that establishes financial accounting and reporting standards for public and private companies and not-for-profit organizations.

The GAAP were originally formulated to address transactions dealing with conventional monetary and non-monetary assets. Recently, the FASB has adopted amendments to the Accounting Standards Codification, the compilation of the standards that make up the GAAP, that are geared to cryptocurrency and other digital assets.

The amendments apply to all assets that:

• meet the definition of ‘intangible asset’ as defined in the FASB Accounting Standards Codification;
• do not provide the asset holder with enforceable rights to or claims on underlying goods, services, or other assets;
• are created or reside on a distributed ledger based on blockchain or similar technology;
• are secured through cryptography;
• are fungible; and
• are not created or issued by the reporting entity or its related parties.

The amendments require that an entity (individual or organization) measure all crypto assets at fair value for each reporting period with changes in fair value recognized in net income. An entity must also provide disclosures about significant holdings, contractual sale restrictions, and changes during the reporting period.

The amendments to the Accounting Standards Codification are effective for all entities for fiscal years beginning after December 15, 2024.

2.2 Tracking cryptocurrency assets

Tracking cryptocurrency assets is important to ensure accurate financial reporting and regulatory compliance. Given the decentralized nature and high volatility of cryptocurrencies, companies must maintain comprehensive records of all cryptocurrency transactions. This includes capturing detailed information such as the date of acquisition, amount, cost basis, and fair market value at the time of the transaction. These records are essential for both internal accounting and external audits to provide a transparent trail of all digital asset activities.

Maintaining such detailed records manually can be cumbersome and error-prone, especially for companies dealing with high volumes of transactions.

2.2.1 Specialized accounting software

Specialized accounting software solutions are available to manage digital assets and cryptocurrency accounting. These solutions are tailored to the unique requirements of digital assets, offering features that simplify tracking and financial reporting. They can automatically sync with blockchain transactions, ensuring real-time updates and accurate data capture. These platforms also provide detailed reports on gains, losses, and holdings, making it easier for companies to monitor their cryptocurrency portfolios.

These software solutions often integrate with existing financial and accounting systems, which facilitates a more efficient and streamlined process for managing digital assets. This integration reduces the risk of errors and improves overall financial oversight.

2.3 Cost allocation

Cost allocation for cryptocurrencies involves determining the appropriate method to assign costs to digital assets and accurately report their financial impact. This process is crucial for understanding the financial performance of cryptocurrency investments and ensuring compliance with tax regulations.

2.3.1 Cryptocurrency gains and losses must be reported on financial statements

When dealing with cryptocurrencies, it is essential to recognize and report gains and losses on financial statements. This involves tracking changes in the value of digital assets over time and ensuring these changes are accurately reflected in financial reports. Proper cost allocation is essential for providing a true and fair view of a company’s financial position.

If the fair market value of the cryptocurrency falls below its recorded cost, any impairment of the asset cost (a permanent reduction in the value of the asset) must be recognized. This means the asset’s carrying amount on the balance sheet should be reduced to reflect its current market value, ensuring that the financial statements accurately represent the asset’s worth.

On the other hand, if the asset’s value increases, these gains are typically not recognized until the asset is sold. This conservative approach helps maintain a prudent financial position and avoids overestimating the company’s assets.

Accurate documentation and reporting are crucial for compliance with tax regulations and to avoid potential penalties. Investors must ensure that all transactions are properly documented, including the date of acquisition, the amount of cryptocurrency involved, and the corresponding cost basis.

2.3.2 First-in-first out

The First-In-First-Out (FIFO) method is a widely used accounting approach for valuing and allocating costs in cryptocurrency transactions. Recognized by the IRS as the default approach, FIFO assumes that the first units of cryptocurrency purchased are considered the first to be sold. This approach simplifies the accounting process by providing a clear, systematic way to determine the cost basis and resulting gains or losses for tax purposes.

FIFO can be particularly advantageous in a rising market, where the cost basis of older, cheaper assets is lower than that of newer acquisitions. By selling the older assets first, companies can potentially realize lower taxable gains, benefiting from the appreciation of their digital assets.

However, FIFO may not always be the most tax-efficient method in a declining market, as it could result in higher taxable gains if the older assets were acquired at significantly lower costs. Therefore, companies should carefully consider their specific circumstances and market conditions when choosing the FIFO method.

2.3.3 Specific identification

Specific identification is another accounting method for tracking and valuing cryptocurrency transactions. This approach allows investors to select which specific units of cryptocurrency are sold, based on their unique acquisition costs. It is a valuation of individual assets, rather than the valuation of a block of assets. This method provides greater flexibility and can be used strategically to manage taxable gains and losses.

For example, an investor might choose to sell units with the highest cost basis first to minimize taxable gains or to offset other capital losses. This approach can be particularly beneficial in a volatile market, where the value of digital assets fluctuates significantly over short periods.

A taxpayer that elects to use specific identification must identify the assets that will be valued in this manner prior to the sale. A specific unit of virtual currency may be identified either by documenting the unit’s unique digital identifier such as a private key, public key, and address, or by records showing the transaction information for all units of a specific virtual currency. This information must show when each unit was acquired, the taxpayer’s basis and the fair market value of each unit when it was acquired, the date and time each unit was sold, exchanged, or otherwise disposed of, and the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.

Implementing specific identification requires meticulous tracking and recordkeeping to ensure that each unit of cryptocurrency is accurately accounted for. This method can be more complex and time-consuming than FIFO, but it offers the potential for significant tax savings and improved financial management.

Additional resources

Related Lexology Pro content

How-to guides:

Understanding the use of cryptocurrency for payments in business
Implementing a policy to avoid cryptocurrency-related scams in business

Checklists:

Key steps to mitigate risks associated with using cryptocurrency

Quickviews:

Introduction to cryptocurrency and how it works
Cryptocurrency regulation and enforcement
Cryptocurrency and US tax laws

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