1) What Is a “Digital Asset” and How Is It Classified for Tax Purposes?

• For U.S. tax purposes, digital assets are treated as property, not currency; general property rules apply to buying, selling, exchanging, and using digital assets. The IRS has explained this framework and how to answer the digital assets question on the Form 1040 series. IRS Digital Assets

• A digital asset is any digital representation of value recorded on a cryptographically secured distributed ledger or similar technology (e.g., cryptocurrencies, stablecoins, NFTs). Digital assets are not “cash” for tax reporting. IRS Digital Assets

• Form 1040 asks if you received, sold, exchanged, or otherwise disposed of digital assets during the year; the IRS page explains when to answer “Yes” or “No” and how to report. IRS Digital Assets; 2024 Form 1040

2) When Is Crypto Taxed as Ordinary Income vs. Capital Gain?

• Ordinary income: If you receive digital assets for services (as wages or as a contractor), or from mining, staking, rewards, or airdrops, their fair market value at receipt is taxable as ordinary income, and the IRS provides guidance on how to report such items. IRS Digital Assets

• Capital gain or loss: If you hold digital assets as investments (capital assets) and later sell or exchange them (including swapping one crypto for another), you compute gain or loss and report sales/exchanges on Form 8949 and Schedule D; holding period determines short‑term (≤1 year) vs. long‑term (>1 year). Instructions for Form 8949 (2024); 2024 Instructions for Schedule D (Form 1041) — capital assets & holding period content referenced

3) Special Income Cases: Airdrops and Hard Forks

• The IRS explains ordinary income recognition when you have dominion and control over units received (e.g., airdrops) and that basis generally equals income recognized at receipt. IRS Digital Assets

4) Mining, Staking, Rewards, and Payments

• Mining: The fair market value of mined coins at receipt is ordinary income; the IRS provides filing guidance for ordinary income items. IRS Digital Assets

• Staking/rewards: Brokers may report rewards/staking on Form 1099‑DA; the IRS outlines reporting responsibilities and that later dispositions may produce capital gain/loss. IRS Digital Assets; 2025 General Instructions (1099 series) referencing 1099‑DA)

• Payments received in crypto: The fair market value at receipt is ordinary income; that amount becomes your basis for later disposition. IRS Digital Assets

5) Determining Basis and Holding Period (Including New Rules for Digital Assets)

• Basis: Property basis equals cost (adjusted by applicable rules); for income items (e.g., mined or airdropped units), basis equals fair market value included in income at receipt. Instructions for Form 8949 (2024); Publication 551 — Basis of Assets (referenced in Form 8949 instructions)

• Reporting on Form 8949: Always report proceeds shown on your information statement in column (d). If the broker’s basis is missing or incorrect, enter the broker’s figure in column (e) and fix it in column (g) using the appropriate code and numerical adjustment; the instructions explain how. Instructions for Form 8949 (2024)

• Identification of units (specific vs. FIFO): Final rules for digital assets require wallet/account‑level identification for assets held with a broker; if no adequate identification is made, the FIFO rule applies. For 2025 only, the IRS provides temporary relief allowing taxpayers to make an adequate identification on their own books by date/time or purchase price, or record a standing order (e.g., highest basis), by the time of sale. Notice 2025‑07

• Transition safe harbor for basis as of Jan 1, 2025: A safe harbor allows allocation of “unused basis” across wallets/accounts as of 1/1/2025—either specific unit or global allocation—subject to detailed requirements, to reconcile basis tracking with new account‑by‑account conventions. Rev. Proc. 2024‑28

Practical Tip for Mismatch Letters

If you receive an IRS notice because the broker reported proceeds but no basis, use Form 8949 to adjust column (g) to add your substantiated basis (with the correct code). Keep robust records—date/time, unit amounts, and fair market values at acquisition and disposition—to support adequate identification and adjustments. Instructions for Form 8949 (2024)

6) Wash Sale, Disallowed Losses, and Broker Reporting Indicators

Brokers may report wash sale loss disallowed on information returns; check your statement and reflect adjustments on Form 8949, and follow the instructions to ensure your return reconciles with broker reporting while correcting basis where needed. Instructions for Form 1099‑B (2025); Instructions for Form 8949 (2024)

7) How to Report on Tax Returns

• Capital asset sales/exchanges: Report each crypto sale/exchange on Form 8949 (short‑term in Part I, long‑term in Part II) and carry totals into Schedule D. Aggregation may be available when basis is reported and no adjustments are needed; see exceptions in the instructions. Instructions for Form 8949 (2024)

• Ordinary income items (mining/staking/rewards/airdrops): Report as additional income (for individuals generally on Schedule 1) when not otherwise reported elsewhere, consistent with IRS guidance. IRS Digital Assets

• Form 1040 digital assets question: Answer accurately; if “Yes,” report any associated income and dispositions on Schedule 1 and/or Form 8949/Schedule D, as applicable. IRS Digital Assets; 2024 Form 1040

8) Broker Reporting for Digital Assets (and Why Basis Mismatches Happen)

• New reporting: Beginning with transactions in 2025, brokers must report gross proceeds for digital asset sales (Form 1099‑DA); the 1099‑B instructions explain coordination and the rollout of digital asset reporting, including due dates and statement furnishing rules. Instructions for Form 1099‑B (2025); 2025 General Instructions for Certain Information Returns

• Basis reporting phases: Basis reporting for “covered” digital assets begins in 2026; pre‑2026 acquisitions and certain transfers are “noncovered,” so brokers may not report basis. You must still compute and report basis on Form 8949. Instructions for Form 1099‑B (2025)

• Broker definition and “sale” scope: Broker rules cover custodial platforms, hosted wallets, kiosks, and certain processors of digital asset payments; “sale” includes swaps of crypto for other digital assets or cash. Instructions for Form 1099‑B (2025)

Proceeds‑Only Reporting Drives Notices

If you get a CP2000 (or similar) because gross proceeds were reported but no basis, correct through Form 8949 (column (g) adjustment) with supporting records (see section 5 above). Instructions for Form 8949 (2024)

9) Backup Withholding, TIN Issues, and Awaiting‑TIN Exceptions

• Backup withholding: Section 3406 backup withholding can apply when payees fail to furnish a correct TIN; digital asset reporting falls under these rules. IRC § 3406 (see section “§ 3406. Backup withholding”); 26 CFR § 31.3406(b)(3)-5 (payment card and third party network transactions; backup withholding timing)

• TIN furnishing rules: The manner required for furnishing a TIN and certain awaiting‑TIN relief rules are provided in the backup withholding regulations; brokers and payors must follow these rules and related certification procedures. 26 CFR § 31.3406(d)-1; 26 CFR § 31.3406(d)-5

10) NFTs and Stablecoins

• Reporting: Brokers report digital asset proceeds, including NFTs, under the 1099 regime. The 1099‑B instructions provide guidance on digital asset reporting and special rules that may apply as reporting phases in. Instructions for Form 1099‑B (2025)

• Optional methods for certain stablecoins and specified NFTs under other rules (e.g., backup withholding) are described in Treasury regulations and related guidance implementing digital asset reporting. 26 CFR § 31.3406(b)(3)-2 (reportable broker payments; digital assets)

11) Cross‑Border Accounts: FBAR vs. FATCA (Form 8938)

Authoritative IRS and FinCEN guidance covers foreign account reporting, but those sources are not included in the materials provided here. If you hold digital assets on foreign exchanges or in foreign custodial accounts, separate FBAR and FATCA reporting may apply; consult official IRS and FinCEN resources for thresholds and filing mechanics. IRS Digital Assets

12) Recordkeeping and Substantiation

Maintain detailed records: acquisition and disposal dates/times; number of units; fair market value at each transaction; cost/basis; and wallet/account identifiers. The IRS requires sufficient records to support positions taken on returns, essential for adequate identification and basis corrections. IRS Digital Assets; Instructions for Form 8949 (2024); Publication 551 — Basis of Assets

13) Handling IRS Notices and Disputes

If the IRS proposes tax due because proceeds were reported without basis, respond with Form 8949 showing column (g) adjustments that reflect your basis (using proper codes), and attach documentation as needed. The 8949 instructions explicitly address correcting broker‑reported basis. Instructions for Form 8949 (2024)

14) Step‑by‑Step Filing Checklist (Summarized)

• Answer the digital assets question on Form 1040 correctly. IRS Digital Assets; 2024 Form 1040

• Report ordinary income (mining, staking, airdrops, payments received) per IRS guidance (generally on Schedule 1 for individuals if not reported elsewhere). IRS Digital Assets

• Report capital gains and losses for disposals on Form 8949 and Schedule D; apply short‑term/long‑term rules. Instructions for Form 8949 (2024)

• If you received 1099‑series forms:

  • Enter proceeds as reported in column (d).

  • If basis was reported incorrectly or not reported, correct in column (g) with appropriate code and documentation. Instructions for Form 8949 (2024)

15) What Changes After 2025?

• 2025: Brokers must report digital asset gross proceeds (Form 1099‑DA). Transitional penalty relief and certain backup withholding relief apply in specified circumstances; see general instructions for due dates and statement rules. 2025 General Instructions for Certain Information Returns

• 2026 and beyond: Brokers must report basis for “covered” digital assets; noncovered assets’ basis reporting remains voluntary. You must still compute and report basis consistently on Form 8949. Instructions for Form 1099‑B (2025)

16) Quick Answers to Common Questions

• Do I pay tax when I swap one crypto for another? Yes—an exchange is a disposition; compute gain/loss in U.S. dollars and report on Form 8949/Schedule D. IRS Digital Assets; Instructions for Form 8949 (2024)

• Do I owe tax when I move crypto between my wallets? No—transfers between your own wallets are not taxable; fees paid in crypto can affect cost basis. IRS Digital Assets

• My broker reported proceeds but no basis (or wrong basis). On Form 8949 report proceeds as shown, basis as reported, then fix basis in column (g) with a code and amount. Keep documentation. Instructions for Form 8949 (2024)

• How do I substantiate my basis and identification? Maintain records of acquisition date/time, cost/FMV at purchase or receipt, quantities, wallet/account IDs. Use 2025 relief to make adequate identification in your own records; use the 2024‑28 safe harbor to allocate unused basis as of 1/1/2025. Notice 2025‑07; Rev. Proc. 2024‑28

Bottom Line

If you keep strong records, use Form 8949’s column (g) correctly, and follow the IRS’s new identification and basis transition guidance, you can significantly reduce mismatch notices and be prepared to substantiate your filings for crypto transactions. The IRS digital asset pages and 1099 instructions are designed to help you report consistently and completely. IRS Digital Assets; Instructions for Form 1099‑B (2025); 2025 General Instructions for Certain Information Returns