Some studies suggest that there is a large “crypto tax gap” that the IRS is trying to close. A tax gap is the difference between the amount of taxes that should be paid and the amount that is actually paid. There are estimates that the crypto tax gap is as high as $50 billion, and it may even be increasing as more investors make money on cryptocurrencies. Accordingly, the IRS is taking steps in 2025 to both increase reporting requirements for crypto transactions and to more strongly enforce tax rules.
If you have any questions about the tax treatment of cryptocurrencies and how it applies to you, seek help from a New York tax lawyer today. Thorgood Law Firm assists with many complicated tax issues and concerns.
Paying Taxes on Gains Related to Cryptocurrency
There are numerous ways that your involvement with cryptocurrencies can trigger a tax obligation. Since cryptocurrency is treated as property as opposed to a traditional currency, there are capital gains obligations when you buy and sell it for a profit. The exact tax rate you pay depends on the holding period. If you have held the cryptocurrency for a year or more, you pay the long-term capital gains tax rate. If the holding period was less than a year, your capital gains are taxed at the same rate as your ordinary income, which can be much higher. You must always classify the holding period correctly, so you can apply the proper tax rate.
There are other ways to earn income with regard to cryptocurrency that can involve complex tax issues. For example, you may earn bitcoins as a crypto miner. Here, not every part of the Bitcoin that you receive as a miner is taxable. It costs money to mine Bitcoin, since you are paying for the costs of electricity and specialized hardware. Here, the taxable profit consists of the cryptocurrency that you receive minus the costs that you incurred to mine it.
When it comes to staking, you are receiving payment for providing a proof-of-stake for blockchains. It is passive income from the cryptocurrency that you already own. You receive payment in new crypto coins. Staking rewards are treated as ordinary income at the fair market value when received. Then, you may also owe capital gains taxes if you sell the cryptocurrency at a profit.
Brokers Have New Reporting Requirements in 2025
U.S. cryptocurrency exchanges are now required to track all of your transactions as of the start of the year. They must report the transactions to you at the end of the year on a new form. The exchange is also obligated to send this form to the IRS starting on January 1, 2026, meaning the IRS will be aware of all your transactions. Now, the IRS has a better ability to track your crypto transactions and determine how much money you may have made. You must report these transactions to the IRS yourself as part of your own tax return.
There Are New Rules for Calculating Cost Basis for Crypto Transactions
In the past, investors employed the “universal wallet approach” to calculate the cost basis for cryptocurrency transactions. This approach pooled assets from all investors’ wallets to calculate the cost basis. Now, the IRS is using the “wallet approach” for calculating cost basis. Currently, you cannot aggregate multiple wallets for the purpose of cost basis calculations. Everything depends on the single wallet. The wallet approach lets you apply your own accounting method consistently, such as FIFO and LIFO. It does mean that you must diligently track all information regarding each individual transaction for tax reporting purposes.
Cryptocurrency Is on the IRS’s Radar Screen
The IRS is now focusing resources on cryptocurrency tax enforcement. The agency has recognized that many investors have previously evaded taxes on cryptocurrency transactions. Now, the agency has established a unit dedicated to addressing crypto tax issues. The agency is increasing the number of audits that it performs related to crypto against the backdrop of the new reporting rules.
The IRS is also becoming more sophisticated in the tracking of crypto transactions. The agency has partnered with external firms to enhance its own technology and implement more advanced blockchain surveillance. Furthermore, the agency is also increasing its own enforcement, particularly to recommending criminal charges against crypto investors for tax evasion. For example, an early crypto investor was sentenced to prison in 2024 for failing to report income to the IRS. You can expect crypto to remain an area of enforcement focus for the IRS going forward, given the substantial amount of taxes that successful crypto investors owe and have paid.
How These Crypto Developments Apply to Me
If you have engaged in a significant amount of cryptocurrency transactions or have a large amount of earnings, you can expect more scrutiny from the IRS. First, there is a higher chance that your tax return may be subject to an audit, even though the overall number of audits is on the decline. Second, you must take steps on your own to better track your transactions, knowing that the IRS will have more information about them. There are two things that you can do to be proactive about the situation:
- Use the proper technology solution so you can better track your transactions and calculate your income.
- Speak to a New York tax lawyer to stay abreast of changes in 2025, especially so you can pay estimated taxes as necessary on your gains.
Contact an Experienced New York Tax Attorney Today
If you have any questions about the tax treatment of crypto transactions, speak to a trusted New York tax attorney at the Thorgood Law Firm today. We maintain a 50-state practice, helping individual taxpayers and businesses across the entire United States. You can schedule a free initial consultation with a New York tax attorney by sending us a message through our website or by calling us today at (212) 490-0704.
