Hi!
We are often asked about crypto reporting, especially with the IRS increasing enforcement in 2026. Below are the main rules and risks we are seeing this year.
Just a few quick points about crypto:
- Trading between one coin and another must be reported to the IRS. Even if you did NOT convert to USD. Every crypto-to-crypto trade is a taxable event and must be reported on Form 8949. The tax rate on long-term gains can be 0%, 15%, or 20%, while short-term gains are taxed at ordinary income rates, up to 37% federally, plus a possible 3.8% Net Investment Income Tax for higher earners.
- 📣 2026 update: The IRS has significantly expanded crypto enforcement. Beginning with 2025 transactions (filed in 2026), exchanges are issuing Form 1099-DA reporting gross proceeds directly to the IRS. The IRS now uses automated matching systems to compare these forms against your tax return. If proceeds are reported but cost basis is missing or calculated incorrectly, the IRS may assume a zero basis, meaning you could be taxed on 100% of the proceeds.
- We are seeing IRS letters assessing additional tax plus a 20% accuracy-related penalty, plus interest, when crypto is underreported or mismatched.
- Other activities that must be reported include ICOs, DeFi transactions, airdrops, hard forks, mining income, staking rewards, NFT sales, and liquidity pool rewards. Most of these are taxed as ordinary income at fair market value on the date received.
- If you had a realized loss on crypto, there may be planning opportunities. Capital losses can offset capital gains dollar-for-dollar. If losses exceed gains, up to $3,000 per year can offset ordinary income, with the rest carried forward indefinitely.
- If you made substantial gains, planning may reduce exposure to the 3.8% NIIT or higher brackets.
- If you have more than a few dozen crypto transactions and are using spreadsheets or even ChatGPT to reconcile them, please be cautious. While summaries may appear correct, cost basis is often calculated incorrectly, especially when assets were transferred between exchanges, wallets, or used in DeFi. Under the new 1099-DA regime, mismatched cost basis is one of the biggest triggers for IRS notices. Incorrect reporting can result in additional tax, 20% penalties, and interest.
- Crypto scams and theft losses may qualify under specific IRS rules, depending on whether the loss meets theft-loss criteria. Proper documentation is critical.
- You may receive a 1099-DA (or previously 1099-K) even if you lost money overall. These forms often report gross proceeds only, not profit. The IRS sees the proceeds number first. It is your responsibility to calculate the correct cost basis.
- Crypto gambling and wagering have separate reporting rules. Winnings are fully taxable. Starting in 2026, you can deduct only 90% of losses, still capped at your winnings, and they must be documented.
If you have been actively trading, staking, or moving crypto across platforms, reply to this email by Monday next week so we can schedule a 40-minute consultation with our senior crypto tax specialist to scope out what your situation needs.
Sincerely,
—
George Dimov, CPA
Licensed and Insured
(833) 829-1120 toll free
(212) 994-8081 Fax
www.dimovtax.com