IRS Alerts Cryptocurrency Investors to Report Taxable Income

Crypto taxes in the U.S.: the key distinction is “disposals” vs. “earnings”

For U.S. federal taxes, the IRS generally treats cryptocurrency and other digital assets as property. That one rule drives most outcomes. When you dispose of crypto, you usually have a capital gain or loss. When you receive crypto as a reward or payment, you usually have ordinary taxable income.

This matters because capital gains and ordinary income can be taxed at different rates. It also matters because the IRS expects you to answer the digital assets question on Form 1040 each year. The question is designed to identify taxpayers with reportable digital asset activity.

This guide is written for tax year 2026 (returns filed in 2027). It also applies to immigrants and visa holders who are treated as U.S. taxpayers. Many people on H-1B, L-1, O-1, and TN become resident aliens under the Substantial Presence Test. Resident aliens generally report worldwide income, including crypto. Nonresident aliens generally report only certain U.S.-source income. See IRS Publication 519 (U.S. Tax Guide for Aliens) at irs.gov/pub/irs-pdf/p519.pdf.

A common misconception is that crypto-to-crypto trades are not taxable. In most cases, they are taxable because you disposed of one property and acquired another. The IRS also continues to increase information reporting from exchanges and brokers. That reporting raises audit risk if your return omits taxable income.

Taxable events across crypto assets: capital gains vs. ordinary income

The cleanest way to classify crypto activity is by the tax “bucket” it falls into.

Side-by-side comparison: how the IRS typically taxes crypto activity

The criteria that decide which bucket applies

1) Did you dispose of an asset?
If you sold, traded, or spent crypto, you likely have a capital gain or loss.

2) Did you receive value you can control?
If you received coins or tokens and have dominion and control, you usually have ordinary taxable income. That is often the case with staking rewards, mining payouts, and many airdrops.

3) Can you prove your basis and FMV?
The IRS expects you to support your numbers with records. Without records, taxpayers often overstate gains or underreport income.

Cost basis: the number that drives your gain or loss

• If you buy 1.0 ETH for $2,000 plus a $20 fee, your basis is typically $2,020.
• If you later sell it for $2,600 and pay a $25 fee, your proceeds are typically $2,575.
• Your capital gain would be $2,575 − $2,020 = $555.

Ordinary income events: income now, basis later

If you receive staking rewards worth $300 on the day you can control them, you generally have $300 of ordinary income then. Your basis in those reward tokens typically becomes $300. When you later sell them, you calculate a capital gain or loss from that basis.

⚠️ Warning: Many taxpayers report only “cash-out” sales. Trading coin-to-coin and spending crypto can still create taxable income.

Non-taxable categories exist, but they are narrower than many people assume. Buying crypto with fiat is generally not taxable. Transfers between wallets you own are generally not taxable, but you still must track basis and dates. Gifts can be non-taxable to the recipient, but large gifts can trigger Form 709 filing by the giver.

For IRS background on taxable income concepts, see Publication 525 (Taxable and Nontaxable Income) on irs.gov/forms-pubs.

2026 tax rates for crypto: there is no special “crypto rate”

Crypto gains and crypto taxable income generally flow into the normal system.

How rates apply in practice

• Short-term capital gains (held one year or less) are taxed at ordinary income tax rates.
• Long-term capital gains (held more than one year) may qualify for preferential rates (commonly described as 0% / 15% / 20%).
• Certain high earners may owe the 3.8% Net Investment Income Tax (NIIT) on some investment income.
• If mining or staking rises to a business-like activity, income may also be subject to self-employment tax, reported on Schedule C.

Holding period is measured from the day after you acquire the asset through the day you dispose of it. The one-year line is often the difference between ordinary rates and long-term capital gains rates.

For immigrants, the rate system is the same once you are a U.S. tax resident. The difference is what income you must report. Resident aliens generally report worldwide crypto activity. Nonresident aliens often have different sourcing and treaty rules. Publication 519 is the starting point.

Filing status and long-term capital gains brackets: your status changes outcomes

Filing status affects bracket cutoffs, which affects how much of your long-term gain is taxed at each capital gains rate.

Long-term capital gains “stack” on top of your other taxable income. That means a gain that would be taxed at 0% for a low-income taxpayer can be taxed at 15% if wages and other income already fill the lower band.

This is why timing matters. Selling after you cross the one-year mark can help. Selling in a year with lower wages can also help. But these are planning concepts, not guarantees.

You should confirm the exact income thresholds for the applicable year before selling. The IRS updates brackets annually.

Reporting requirements and forms: what goes where on the return

For tax year 2026 (filed in 2027), the core reporting workflow still looks like this.

1) The Form 1040 digital assets question

Form 1040 asks whether you received, sold, exchanged, or otherwise disposed of a digital asset during the year. The plain-English point is: tell the IRS whether you had reportable digital asset activity.

Answering incorrectly can create problems later, especially if an exchange reports your activity to the IRS.

2) Capital gains reporting: Form 8949 → Schedule D → Form 1040

Most disposals belong on:

• Form 8949 (each taxable disposal, with dates, proceeds, basis, and adjustments)
• Totals to Schedule D
• Then to Form 1040

Example: You made 50 trades on an exchange. You still must report the totals and keep support showing each transaction’s basis and proceeds.

3) Ordinary income reporting: Schedule 1, Schedule C, or W-2

• Staking rewards, airdrops, and similar income often flow through Schedule 1.
• If your activity is business-like, you may report it on Schedule C.
• If you were paid as an employee in crypto, it should generally appear on your Form W-2. The crypto value is typically measured in dollars at the payment time.

4) Information reporting: exchanges and broker statements

Brokers and exchanges may send tax forms that reflect sales or other activity. Reporting rules are evolving, and forms can vary by platform and year. The practical point is simple: do not assume the form is complete or correct. Compare it to your own transaction history.

5) Records: your first line of defense

The IRS expects you to keep defensible records, including:

• Cost basis and acquisition dates
• FMV at receipt for rewards
• Sale dates and proceeds
• Fees
• Wallet addresses and transaction IDs
• Exchange statements and CSV exports

The IRS forms and publications hub is irs.gov/forms-pubs.

📅 Deadline Alert: For tax year 2026, most individuals file by April 15, 2027. An extension generally moves the filing deadline to October 15, 2027, but not the payment deadline.

Common mistakes (and how to avoid them)

Mistake 1: Reporting only cash sales.
Fix: Track every disposal, including crypto-to-crypto trades and purchases.

Mistake 2: Missing staking, airdrop, or mining income.
Fix: Identify the timestamp when you had control and capture the USD FMV.

Mistake 3: Losing cost basis after wallet transfers.
Fix: Treat transfers as bookkeeping events. Keep acquisition dates and basis with the coin.

Mistake 4: Mixing resident and nonresident rules.
Fix: Determine your U.S. tax residency first. Use Publication 519 and consider treaty rules.

Mistake 5: Assuming exchange forms match your tax result.
Fix: Reconcile forms to your own records. Correct mismatches before filing.

Penalties, IRS guidance, and correcting errors

If you underreport taxable income, the IRS can assess interest and penalties. Penalties can apply for late filing, late payment, and accuracy issues. The most common crypto problem I see is missing income because taxpayers rely on incomplete reports.

If you discover an error after filing, you may need an amended return (often Form 1040-X). The right approach depends on what changed and how material it is.

For official guidance, start with the IRS digital assets page at irs.gov/individuals/international-taxpayers and the IRS publications on taxable income (Publication 525). The IRS also posts digital asset updates on irs.gov/newsroom.

You are “capital gains” vs. “ordinary income” if…

You are reporting capital gains/losses if you:

• Sold crypto for dollars.
• Traded one token for another.
• Spent crypto on goods or services.

You are reporting ordinary taxable income if you:

• Received staking or mining rewards you can control.
• Received an airdrop and gained control of the tokens.
• Were paid in cryptocurrency for work or services.

You should prioritize these actions now:

• Confirm your U.S. tax residency for 2026 using Publication 519.
• Export your 2026 exchange and wallet history, including fees and timestamps.
• Map each activity to Form 8949/Schedule D or Schedule 1/Schedule C before filing by April 15, 2027.

⚠️ Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax situations vary based on individual circumstances. Consult a qualified tax professional or CPA for guidance specific to your situation.