Understanding the Tax Treatment of Cryptocurrency

By Robert P. Russo, CPA PC

The tax treatment of cryptocurrency, particularly for activities like “staking,” has become a critical topic for investors. The IRS continues to clarify its position on digital assets, with new rules and reporting requirements taking effect in 2025. Here’s an updated look at what you need to know.

What is Staking?

Staking is a way for cryptocurrency holders to earn rewards by participating in the security and operation of a blockchain network. It’s a key function of blockchains that use a “proof-of-stake” consensus mechanism. Instead of using powerful computers to solve complex puzzles (the “proof-of-work” method used by Bitcoin), proof-of-stake networks rely on users who “lock up” or “stake” a certain amount of their cryptocurrency.

By staking your crypto, you are essentially helping to validate and verify new transactions and create new blocks on the blockchain. In return for your participation and for keeping your crypto locked, the network rewards you with additional units of that cryptocurrency. This is similar to earning interest in a traditional savings account, but with the added risks and volatility of the crypto market.

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How Staking Rewards Are Taxed

According to the IRS, cryptocurrency is treated as property, not currency. This means that when you receive staking rewards, they are considered a form of income.

• When to Report Income: You must include the fair market value of staking rewards in your gross income in the year you gain “dominion and control” over them. This generally means when you can sell, exchange, or otherwise dispose of the rewards.
• Calculating Fair Market Value: The amount of income you report is based on the fair market value of the cryptocurrency on the date you received it.
• Filing Requirements: This income is typically reported on Form 1040, Schedule 1.

New for 2025: Broker Reporting and Form 1099-DA

Beginning January 1, 2025, there are significant changes to how cryptocurrency transactions are reported to the IRS.

• Form 1099-DA: Crypto brokers and exchanges are now required to issue a new form, Form 1099-DA, to report digital asset sales and exchanges to both you and the IRS. For transactions in 2025, this form will report the gross proceeds from your sales.
• Cost Basis Reporting: While brokers will report gross proceeds for 2025, they are not yet required to report your cost basis (the original value of your crypto plus any fees). This is scheduled to begin in 2026. Therefore, for your 2025 tax return, you will need to rely on your own records to calculate capital gains and losses.
• Wallet-Level Accounting: The IRS now requires investors to track cost basis on a wallet-by-wallet basis, rather than using a universal accounting method.

Capital Gains and Losses

After you receive staking rewards and report them as income, any subsequent sale or exchange of that cryptocurrency is a separate taxable event.

• Capital Gains: If you sell your staking rewards for more than their fair market value on the day you received them, you will realize a capital gain.
• Short-Term vs. Long-Term: The tax rate on your capital gains depends on how long you held the asset before selling.
  • Short-Term: If you held the crypto for one year or less, your gain is taxed at your ordinary income tax rate.
  • Long-Term: If you held the crypto for more than one year, your gain is taxed at the lower long-term capital gains tax rates (0%, 15%, or 20%, depending on your income).
• Form 8949 and Schedule D: You will need to use Form 8949 and Schedule D to report your capital gains and losses.

*Disclaimer: This blog post is for informational purposes only and is not a substitute for professional tax advice. Book an appointment to discuss your specific situation.

MEET ROBERT P. RUSSO, CPA PC

As the founder and principal of Russo CPA, P.C, Bob pleasantly surprises clients (plus the IRS and lawyers) with his proactive, caring, and interested approach. Bob’s authentic passion for both numbers and people is why his accounting firm is sought after by everyone from solopreneurs to CFOs. And it’s what energizes his fast-growing team of top CPAs who follow his lead by providing impeccable service to clients – without the CPA geek speak.

The only thing geeky about Bob is his favorite reading material: the latest tax regulations, codes, and rulings (so he can secure every possible tax advantage for his clients). You might mistake Bob for the charismatic entrepreneur and CFO behind an internet travel startup or a visionary real estate developer. That’s because he held those roles during his 30-year career as an accountant, which began at a high-profile accounting firm. While CPAs aren’t required to have “field” experience, the best ones do. But Bob doesn’t define success by his own achievements, it’s what he achieves for his clients. Because of his entrepreneurial past, Bob relates so well to his clients. In addition to serious tax savings most firms would miss, he empowers his clients with real-world accounting and financial insights to increase business.

Bob is even results-driven outside of work, whether it’s finishing the 2012 NYC Iron Man or volunteering for 12 years as President of a kids’ soccer league. While his bottom-line results are always impressive, what matters to Bob are the people who benefit from them.

When he’s not immersed in accounting, Bob is with his family, cooking up elaborate 18-course meals or globetrotting.

Robert P Russo CPA PC
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