Step 1: Answer the digital asset question on Form 1040
This question appears on every Form 1040, not just returns with reportable crypto activity. Simply owning crypto that sits untouched in a wallet doesn’t require a “yes,” but any sale, trade, payment, or reward involving digital assets does.
| Activity | Counts as taxable income? |
|---|---|
| Buying and holding crypto | No |
| Moving crypto between your own wallets | No |
| Selling crypto for cash | Yes—capital gain or loss |
| Trading one crypto for another | Yes—capital gain or loss |
| Earning crypto (staking, mining, rewards) | Yes—ordinary income |
| Airdrop | Yes—ordinary income |
| Fork | Yes*—ordinary income **taxable if followed by a receipt of new tokens* |
Step 2: Report sales and trades on Form 8949 and Schedule D
Each sale, trade, or other disposal gets its own line on Form 8949, listing the asset, acquisition and sale dates, proceeds, and cost basis. Sort transactions into short-term (held one year or less) and long-term (held a year and a day), then carry your totals to Schedule D, which calculates your overall capital gain or loss.
Step 3: Report crypto income separately on Schedule 1
If you earned crypto through staking, mining, or as a reward, that’s ordinary income, not a capital gain, and it belongs on Schedule 1 as other income. If you’re a business that’s paid or pays others in crypto, those transactions are included on Schedule C. The fair market value of the crypto when you received it is what you report.
Reconciling Form 1099-DA with your own records
Starting with the 2025 tax year, exchanges must issue Form 1099-DA reporting gross proceeds from your crypto sales and exchanges. This form often doesn’t include accurate cost basis, especially for crypto transferred in from another platform, so keep your own purchase records to make sure your Form 8949 entries are correct, even if they don’t perfectly match the 1099-DA.
