The IRS treats cryptocurrency and digital assets as property, which means nearly every transaction can trigger a taxable event. Yarborough & Potter helps individuals and businesses in the Charlotte area report their digital asset activity accurately, stay compliant with evolving IRS requirements, and resolve issues from prior years when crypto went unreported.
Digital assets are no longer a gray area for the IRS. Every year since 2019, the individual tax return has included a direct question asking whether you received, sold, exchanged, or otherwise disposed of any digital assets during the year. Answering that question incorrectly, whether intentionally or by mistake, can create real problems.
The IRS has also expanded its enforcement tools. Major exchanges are now required to report user activity, and the agency has used court orders to obtain customer data from platforms in the past. Proposed regulations around Form 1099-DA will bring even more transaction-level reporting into the IRS’s hands in the coming years. The days of assuming crypto flies under the radar are over.
The challenge for most people isn’t willingness to comply. It’s knowing how. Cryptocurrency tax reporting is unlike anything else on a standard tax return. Hundreds or even thousands of transactions across multiple exchanges and wallets, each with its own cost basis, holding period, and tax treatment. Add in staking rewards, DeFi activity, airdrops, and NFTs, and the complexity grows quickly.
Yarborough & Potter helps crypto holders and digital asset investors make sense of all of it. We work with you to track your activity, calculate your gains and losses, report everything accurately on your return, and deal with any prior years that need to be addressed.
The IRS treats digital assets as property, not currency. That distinction is important because it means the same rules that apply to selling stocks or real estate apply to your crypto. Here’s how the most common situations are treated.
When you sell Bitcoin, Ethereum, or any other cryptocurrency for U.S. dollars, you realize a capital gain or loss based on the difference between what you paid (your cost basis) and what you received. How long you held the asset determines whether the gain is taxed at short-term or long-term capital gains rates.
Swapping Bitcoin for Ethereum, or any crypto-to-crypto exchange, is a taxable event. The IRS treats it as if you sold the first asset and purchased the second. You need to calculate the gain or loss on the first asset at the time of the trade.
Spending cryptocurrency is treated the same as selling it. If the value of the crypto at the time you spent it is higher than what you originally paid, you have a taxable gain.
If you’re paid in cryptocurrency for work, freelance services, or any other form of compensation, the fair market value at the time you receive it is treated as ordinary income. This applies to employees, independent contractors, and anyone who receives crypto as payment.
Staking rewards and mining proceeds are taxed as ordinary income at the fair market value on the date you receive them. They also establish a new cost basis for the assets, which matters when you eventually sell or trade them.
If you receive new tokens through an airdrop or a hard fork and have the ability to access and control them, the IRS considers that taxable income at the time of receipt.
Buying, selling, and trading NFTs are all taxable events. If you created and sold an NFT, the proceeds are generally treated as ordinary income. If you purchased an NFT and later sold it at a profit, that’s a capital gain. The IRS has also indicated that certain NFTs may be treated as collectibles, which carry a higher tax rate.
Liquidity pool transactions, yield farming, token swaps on decentralized exchanges, and other DeFi activity all carry potential tax implications. The treatment depends on the specific mechanics of each transaction, and the IRS is still developing formal guidance in some of these areas. That doesn’t mean the activity is exempt. It means proper documentation and conservative reporting are especially important.
We prepare tax returns that include digital asset activity across all common scenarios: trading, selling, staking, mining, earning, spending, and more. We calculate your capital gains and losses, report your income correctly, and make sure your return reflects every transaction the IRS expects to see.
Accurate cost basis is the foundation of crypto tax reporting, and it’s where most people run into trouble. If you’ve traded across multiple exchanges, moved assets between wallets, or used DeFi platforms, your transaction history can be difficult to piece together. We work with your exchange records, wallet data, and transaction logs to reconstruct your cost basis and calculate your gains and losses for each taxable event.
Most crypto holders don’t keep everything on one platform. We pull data from multiple exchanges and wallets, reconcile the records, and build a complete picture of your activity for the tax year. If exchange records are incomplete or unavailable, we work with whatever data exists and use reasonable methods to fill in the gaps.
If you had crypto activity in prior years and didn’t report it, that’s a problem you want to get ahead of before the IRS finds it first. We can prepare amended returns or original delinquent returns that include your digital asset activity, and help you get into compliance as cleanly as possible.
The IRS has been sending letters to crypto holders it suspects of underreporting. If you’ve received a notice related to digital asset activity, we can help you understand what’s being asked, prepare the appropriate response, and represent you if the situation escalates into an examination.
Crypto tax reporting requires a combination of technical knowledge and practical tax experience. You need someone who understands how blockchain transactions work and how the IRS treats them.
No. Simply holding cryptocurrency does not create a taxable event. You owe taxes when you sell, trade, spend, or otherwise dispose of the asset. You also owe taxes on crypto received as income, staking rewards, mining proceeds, and airdrops, even if you haven’t sold those assets yet.
Yes. Capital losses from cryptocurrency can be used to offset capital gains from other investments or crypto trades. If your losses exceed your gains, you can deduct up to $3,000 per year against ordinary income, with the remainder carried forward to future years.
We pull transaction data from each exchange you’ve used, consolidate the records, and reconstruct your cost basis using accepted accounting methods like FIFO (first in, first out) or specific identification. If some records are unavailable, we work with what’s accessible and apply reasonable approaches to fill in the gaps.
The best thing you can do is get ahead of it. We can prepare amended returns or delinquent original returns to bring your prior-year crypto activity into compliance. Voluntarily correcting the issue before the IRS contacts you generally leads to a better outcome.
Increasingly, yes. Major exchanges like Coinbase, Kraken, and others have been required to provide customer data to the IRS, either through routine reporting or in response to court orders. New regulations will require even more detailed reporting from exchanges in the near future. The IRS is also using blockchain analytics tools to trace on-chain activity.
Staking rewards are treated as ordinary income at the fair market value on the date you receive them. When you eventually sell the staked tokens, you’ll also owe capital gains tax on any increase in value since the date of receipt.
The basic framework is the same: buy low, sell high, pay capital gains. But the IRS has indicated that some NFTs may qualify as collectibles, which are taxed at a higher maximum rate of 28%. Whether your NFT falls into that category depends on what the underlying asset represents.
This is more common than people think. We can work with partial records, blockchain data, email confirmations, and other sources to reconstruct your transaction history. The goal is to build the most accurate and defensible picture possible with the information available.
Don’t ignore it. The IRS has sent multiple rounds of letters (CP 2000, Letter 6173, Letter 6174, Letter 6174-A) to taxpayers it believes have unreported crypto activity. The appropriate response depends on which letter you received and what activity is in question. We can review the notice and advise you on the best path forward.
Whether you’re reporting current-year trades or catching up on years of unreported activity, digital asset taxes don’t have to be a source of anxiety. Our team can help you understand what you owe, pull your records together, and file accurately so you’re not looking over your shoulder.
Free consultation. No judgment about how your records look. Just a clear conversation about where you stand and what needs to happen next.
Yarborough & Potter Inc. is eager to answer your queries about our tax services. You can begin your relationship with us today by contacting us using the form below.
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