In Part I: Welcome To The Crypto Zone,[1] Where Are We? I reviewed the global crypto[2] landscape where people engage in a wide range of digital asset transactions and activities. In Part II: What Can We Find Here? I focused on digital asset definitions, tax character, and what types of crypto-related income streams and related expenses U.S. taxpayers need to determine when reporting certain crypto transactions. Here in Part III: How Do We Get Out? we’ll focus on digital asset tax return filing requirements. And yes, you’ve guessed it . . . the only way to get out of The Crypto Zone is to file!
We will start this final part of this Q&A with Andie, by looking at the “digital asset question” that is now included on most U.S. federal income tax returns. I will touch on the fundamentals of calculating tax basis, mention some state and local filing obligations, and conclude with a quick look at some of the resources that can help you meet your compliance obligations. This part of the series also updates my 2023 article, Tax Return Reporting of Cryptocurrency.[3]
How has “the digital asset question” changed in recent years?
“The digital asset question” now appears on many federal income tax returns. It was first added to individual and senior income tax returns in 2019, but this question has evolved and changed over time. Taxpayers must answer the digital asset question and report all digital asset-related income when they file their returns. The 2025 digital asset question asks
at any time during the tax year, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?[4]
This question is prominently located on the first page of the 1040 (Individual Income Tax Return);[5] the 1040-SR (Senior);[6] and the 1040-NR (U.S. Nonresident Alien).[7] Also, slightly reworded versions of the question can be found on the 1041 (Estates and Trusts) form at Schedule G, Tax Computation and Payments, Other Information;[8] 1065 (Partnership) form at Schedule B, Other Information;[9] the 1120 (Corporation) form at Schedule K, Other Information;[10] 1120-S (S Corporation) form at Schedule B, Other Information;[11] and 709 (Gift and Generation-Skipping Transfer) form at Part I, General Information.[12]
To help taxpayers answer the digital asset question, the IRS provides a series of questions and answers on their website.[13] Let’s run through them all—as, occasionally, I will add my thoughts and clarifications to them.
You only purchased digital assets (with U.S. or other real currency) or only held them in a wallet or account
If the taxpayer did not receive, sell, or dispose of a digital asset, check “No.” Taxpayers do not need to report purchasing digital assets using U.S. dollars or another fiat currency, including purchases made through electronic platforms such as Etsy, PayPal and Venmo. Taxpayers also do not need to report that they hold digital assets in a wallet or account when there were no transfers.
You received, sold, disposed of, or transferred digital assets
If the taxpayer received, sold, or disposed of a digital asset, check “Yes.” If digital assets were transferred between wallets or accounts owned or controlled by the same taxpayer, the correct answer to this question is “No”—but if the taxpayer still holds the crypto but paid a fee in crypto to transfer those digital assets, this “No” answer flips to become a “Yes” (assets were sold to pay fees).
You swapped or used your digital assets to purchase different digital assets
If the taxpayer disposed of a digital asset they owned when they purchased a new digital asset, check “Yes” to this question.
You paid for goods or services of any dollar amount (example: a cup of coffee) with digital assets
If the taxpayer paid for goods or services, they disposed of the digital asset, so check “Yes.”
You had digital asset transactions with stablecoins
If a taxpayer does not have ownership of stablecoins after the transaction, check “Yes.” If the taxpayer still owns the stablecoins, but paid a fee for the transaction in digital assets, check “Yes.” If the taxpayer still owns the stablecoins after the transaction and the taxpayer paid a fee in U.S. dollars for the transaction involving stablecoins, check “No.” If the taxpayer still owns the stablecoins and did not pay a fee for the transaction involving stablecoin, check “No.”
You gifted or donated a digital asset
If the taxpayer gifted the digital asset, they disposed of it, so check “Yes.” For more details on donations of cryptocurrency, you can refer to some of my earlier articles.[14]
You disposed of an exchange-traded fund (ETF) that had digital assets in it
Although a taxpayer is required to report the disposal of an ETF that holds digital assets,[15] the taxpayer checks “No” if they did not receive, sell, or dispose of a digital asset. In other words, disposing of an investment in an ETF that holds crypto is different from disposing of crypto assets that are held directly by the taxpayer. This is an important distinction.
Does tax analysis start and end with the crypto question on the relevant tax form?
No. U.S. taxpayers who are active in crypto cannot just answer the digital asset question on the appropriate tax return. They must also report their digital asset transactions, regardless of whether these transactions generate taxable income. I have already written about many digital asset tax issues taxpayers’ face once they find themselves in The Crypto Zone.[16]
If you receive copies of any 1099 forms from individuals and entities that have made payments to you, you should retain these forms for a minimum of five years. The IRS does provide specific recommendations on property (remember, crypto is property) as follows: “[g]enerally, keep records relating to property until the period of limitations expires for the year in which you dispose of the property.”[17]
Use 1099 forms to help organize your tax obligations, but as I discuss at length in Part 2, you cannot simply pull numbers off of those 1099s and drop them into your tax returns. To get to the correct numbers for your tax return, you must compare the numbers on the 1099s with your trading account and tax accounting records. This process will help you to determine which crypto activities are reportable and taxable.
If “gross proceeds” numbers you receive on a 1099 form are not the same as your internal records, you can try to get a revised 1099 from your broker. But, if not, be sure to note on your tax return the fact that you are reporting the correct numbers. This annotation on your tax return can prevent an IRS audit if your tax return numbers don’t match up to the 1099s previously submitted by payors to the IRS.
Tax basis
Tax basis is a core tax concept in determining taxable income. As the IRS explains, “basis is generally the amount you paid for the asset. Taxpayers start with their tax basis to figure out their depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale, exchange, or other disposition of that property.”[18]
Tax basis starts with (1) the original purchase price you paid for the asset “in cash, debt obligations, and other property or services[19]”; plus (2) any costs, like commissions, recording, or transfer fees related to the purchase; plus (3) sales tax. Taxpayers that have acquired digital assets other than through a direct purchase (such as a gift or inheritance) should refer to IRS Publication 551, Basis of Assets, for more information.[20]
For stocks or bonds, tax basis is your purchase price plus any additional costs you incur. If you receive stocks or bonds without purchasing them, your tax basis is usually determined by the fair market value of the assets on the date you received them from the previous owner at their adjusted stock basis. Refer to Publication 550, Investment Income and Expenses for more information.[21]
Before determining gain or loss on a sale, exchange, or other disposition of property, the taxpayer must determine their adjusted basis in that property. Adjusted tax basis results after tax basis is increased by expenses such as the cost of improvements to property, and decreased by items such as allowable depreciation and insurance reimbursements for casualty and theft losses.
Since crypto is “property,” the following tax principles apply:
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Payments made in crypto for goods and services are taxable events.
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Crypto rewards received for mining and staking validation activities are taxable income, based on their fair market value at the time the rewards are received as long as the taxpayer has “dominion and control” over the rewards.
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Direct tax liabilities of a miner or staker might trigger both income tax and self-employment tax.
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Crypto investors and traders generate capital gains or losses on the sale or exchange of their crypto investments. Even though miners and stakers receive ordinary income or loss on the crypto they receive for validating transactions, they can generate capital gain or loss when they subsequently sell or exchange their crypto rewards.
Trader reporting obligations
On their tax returns, traders often include the Schedule D, Form 8949, and—if they enter into section 1256 contracts—the Form 6781 (section 1256 tax treatment applies to regulated futures contracts, foreign currency forward contracts, and non-equity options).[22]
State and local tax considerations
In addition to federal tax, most states and municipalities impose taxes on residents and those who do business in their jurisdictions.
State tax obligations and rates vary dramatically, while each state chooses whether and how it conforms its tax statutes to the Internal Revenue Code.[23] What is universal is that every state that imposes a corporate income tax conforms its tax bases in one way or another to the Internal Revenue Code. Because each state must annually balance its budget, many states that levy income taxes choose to decouple them from one-or-more of the federal tax rules in order to raise tax revenue for that specific state.
This means that taxpayers must understand these differences and apply the correct calculations when preparing their state tax returns. Many states assume that the taxable income figure a taxpayer reports on their federal tax return is correct, so they use that number as the starting point to calculate state taxes.
Part of a taxpayer’s digital asset reporting will be based on the new 1099-DA forms reported by brokers. Accordingly, it is very important for taxpayers who live and work in states that do conform with the Internal Revenue Code (that is, most U.S. states) to make sure that the 2025 Form 1099-DA reports they receive accurately lines up with their digital asset activities as they report them on their federal income tax return. Any discrepancies can be reflected at both the federal and state levels.
Taxpayers need to carefully track their tax basis in crypto and reconcile their transactions across their wallets, De-Fi activities, and crypto exchanges. When crypto taxpayers and the entities and individuals with which they do business or invest in, take inconsistent tax return positions, not only will they face the possibilities of federal tax audits, but we can expect to see state tax audits as well. In other words, both federal and state tax audits can be triggered by any discrepancies between numbers on taxpayers’ tax returns and incomplete numbers reported on various 1099s.
To add to this confusion, not only are state-by-state income tax approaches all over the place, but states also vary widely in their approaches to taxing cryptocurrency transactions with respect to income tax, and sales and use tax purposes. Both Kansas and Kentucky, for example, require crypto used in paying sales tax to be converted into U.S. dollars. Washington state imposes tax on purchases of goods and services in crypto.
Some states tax cryptocurrency investments.[24] California, for example, imposes tax on crypto gains of up to 13.3 percent; Hawaii imposes a tax of close to 11 percent; Minnesota imposes a tax of up to 10.85 percent; New Jersey taxes crypto at up to 10.75 percent; New York imposes taxes of up to 10.9 percent; and Oregon taxes property of up to 9.9 percent.
Suffice it to say, the state and local tax implications for Crypto Zone taxpayers are becoming increasingly complicated. Local municipalities are also moving in on the action, notably New York City, with excise taxes and taxes on crypto mining facilities in early approval and at the legislative proposal stages. Taxpayers should always check with applicable state and local taxing authorities to help determine their state and local tax obligations.
There are many tools to help you . . .
Taxpayers are not “on their own” when it comes to tax reporting. There are a wide range of third-party providers that offer crypto valuation, portfolio tracking services, crypto accounting, and bookkeeping services.
Taxpayers that sell, swap, or exchange crypto assets might benefit from third-party services and technologies. Companies such as TaxBit (the crypto audit partner for the IRS), Awaken Tax, CoinTracker, CoinLedger, CryptoTaxCalculator, ZenLedger, and many other providers can help taxpayers accurately track their state and federal tax obligations. Providers such as these offer tiered offerings based on the sophistication of the taxpayer, the volume of trading, price points, and needs for proactive customer support.
According to Awaken, [25] its tools support DeFi and NFTs, foreign tax compliance; flag specific tax-loss harvesting opportunities, generate standard forms like Schedule D and Form 8949; and deliver audit trail reporting.[26] These third-party services can be integrated with standard tax accounting preparation software.[27] For example, TaxBit has partnered with TurboTax to help taxpayers add crypto gains and losses to their tax returns.[28] Trackers like CoinTracker provide some assistance with multijurisdictional compliance; incorporating information from exchanges and wallets; reconciling on-chain activity; and adding various layers to a customer’s platform package to reflect the accounting rules in different jurisdictions.[29]
All of these providers and many others not mentioned here—along with the markets they serve—are evolving quickly. As a result, U.S. taxpayers need to conduct their own due diligence and investigation to determine whether a provider or a combination of providers can offer the tax support they need. Of course, while good tools can be helpful, they can never replace the assistance of qualified professionals. In evaluating your overall tax situation, you should obviously consult with qualified professionals who can consider your specific facts, circumstances, and application of the law in all relevant jurisdictions.
Conclusion
There is a lot of confusion in “The Crypto Zone.” And this is precisely why I have written this series. There has never been a time when there has been more interest in crypto; in the benefits of taxpayer education, and in the growing need for tax and regulatory clarification. This series is not a tax policy or scholarship piece. It is for everyday people: U.S. taxpayers who engage in crypto activities who need to understand the current state of crypto regulation and taxation.
You may be aware that in the fall of 2025 I testified before The United States Senate Committee on Finance Congress on digital assets taxation.[30] I have also written extensively about crypto taxation and regulations for quite some time. Interested readers can access my thought leadership at the crypto archive on our website and in peer-reviewed journals.[31]
I hope to have cleared up a few of your questions with this series. Taxpayers need to be aware that while The Crypto Zone is still a very different kind of multipronged, multifaceted, multi-dimensional place where brilliant people and leading technologies redefine how transactions take place, investments are made, and business is conducted; crypto tax, regulation, and enforcement are equally important—and a necessary and important part of a taxpayer’s due diligence.
In 2026, taxpayer data is being shared, reviewed, and analyzed across multiple systems and networks as never before. And the possibility of IRS audits is increasingly likely for those who fail to explain discrepancies between numbers entered into tax returns and provided on 1099s submitted to the U.S. government.
With the issuance of 1099-DA forms and the digital asset question on tax returns, it is not possible for taxpayers to claim they were not aware of their crypto reporting obligations. The IRS has both the mandate and a budget to close the federal crypto tax gap.[32]U.S. taxpayers active in crypto need to be ready to comply. They need to know what types of crypto activities are taxable and what records they should be accumulating so they can move forward to determine their reporting and filing responsibilities in The Crypto Zone.
These are exciting times in The Crypto Zone as this innovative sector continues to evolve; and in 2026, U.S. digital asset taxation is becoming even more complex. Just this last month, the government released a new rule clarifying how federal securities laws apply to certain types of crypto assets,[33] as well as a proposed rule addressing responsibilities of fiduciaries of tax-advantaged retirement plans that include digital assets.[34] I plan to offer practical insights and information on the tax and regulatory developments and others in my upcoming articles.
