We began this series with Part I:Where Are We? by reviewing the background, developments, and implications of current global and national regulatory and tax frameworks for digital assets. In Part II: What Can We Find Here? I look at what taxpayers can find as they consider the types of income they receive from crypto[1] activities. In Part III How Do We Get Out? I will address how U.S. taxpayers figure out tax basis and ways to better understand their 2025 tax return filing obligations.
Here in Part II, I take U.S. taxpayers through what—precisely—might qualify as a digital asset. Next, I look at how the IRS defines and taxes digital assets. And then I review some likely sources of crypto-related income and compensation U.S. taxpayers could receive as a result of their activities in the Crypto Zone.[2]
Together, we look at some of the IRS 1099 forms that payors use to report various payments made to taxpayers showing income streams from sources other than employment. I go into the reasons taxpayers may want to carefully review the 1099s they receive for the past tax year. This review can be helpful for taxpayers when organizing their crypto activities, since they line up with 1099s they received that relate to direct crypto transactions; crypto earnings and compensation received from crypto-related activities; and trading and investment activities. Later in the article, we will go through some of the crypto areas that some of the more popular 1099s cover. But first, let’s start at the beginning. . . .
What is a digital asset?
The IRS defines a digital asset as “any digital representation of value that is recorded on a cryptographically secured distributed ledger, or any similar technology,” without regard to whether each digital asset transaction is actually recorded on that ledger, “and that is not cash (for this purpose, United States dollars or any convertible foreign currency that is issued by a government or a central bank, whether in physical or digital form). Examples of a digital asset generally include […] virtual currencies, cryptocurrencies such as bitcoin, stablecoins, and non-fungible tokens (“NFTs”).”[3] The IRS says such digital assets are taxed as property.[4]
Because crypto is “property” how and when does it get taxed?
When a U.S. taxpayer disposes of a capital asset such as real estate, stocks, bonds, or crypto, the tax rules that apply to property apply to these transactions. Crypto is “disposed” of when it is sold; exchanged for other crypto; contributed to a charity; or gifted to another person. Property can also be repossessed or abandoned. When taxpayers dispose of crypto, in whole or in part, they must figure out: (1) the gain or loss on its sale, exchange, or disposition; (2) whether the gain or loss is “ordinary” or “capital”; (3) how the property owned by a business is taxed; and (4) how to report any related income to the IRS.
These rules apply without regard to where in the world the gain or loss is incurred or whether a foreign payor has provided the U.S. taxpayer with appropriate U.S. tax documentation.
What are some popular tax forms?
When U.S. taxpayers file individual or joint tax returns, they report to the IRS on a 1040 form, or some variant of that form. After the end of each tax year, the taxpayer files a tax return that provides the IRS with proof of their income, deductible expenses incurred, and taxes paid, along with additional paperwork to support their tax positions. Other required forms and schedules are attached to the return to substantiate the taxpayer’s activities.
To corroborate payments made to recipients (payees) from various sources, certain payors file information forms that report a range of payment types made to U.S. taxpayers. They file these information forms with the IRS, sending a duplicate copy to the taxpayer who received those specified payments in the given tax year.[5] These information forms include the W-2, 1099, and 1095 forms, and taxpayers need to keep track of them all.
The W-2 is familiar to employees who earn wages in the United States. Less common is the W-2G, which covers lottery and gambling winnings. 1095 forms are used to report certain types of healthcare coverage. And then there are 1099s that are used to report a broad range of income. Taxpayers who itemize deductions or report tax credits must keep appropriate records and be prepared to share them with the IRS if requested to do so.
In what follows, I look at popular 1099 forms that get filed with the IRS to report payments the taxpayer receives from payors because of various crypto activities. 1099 forms can be useful to taxpayers as they figure out which crypto activities generated income for them and help them organize those records that need to be considered when filing their tax returns.
What are 1099 forms and why do they matter?
A 1099 is a mandatory tax record. The payor files 1099s with the IRS, and provides a duplicate copy to each payee taxpayer, showing the total amounts of payments from sources other than employment in the given tax year.[6] 1099s are filed during the first quarter of the year following the tax year in which the income was earned or payments were received.[7] Copies of the 1099s that taxpayers receive are tax records that are required to be retained, which is usually for five years.
Payors responsible for filing the 1099s can make mistakes, copies of 1099s can get lost in the mail, and some information on the forms can be inaccurate. Taxpayers must also understand that the burden is on them to report all payments they received during the prior tax year, even if they do not receive all required information forms they should receive from payors. Nobody is perfect; but the IRS catches those imperfections.
Payors report a wide range of payment types through 1099 filings. There are 22 flavors of 1099 forms,[8] including the 1099-DA form that reports sales or exchanges of digital assets like cryptocurrency. The 1099-DA form is new for the 2025 tax year. All crypto exchanges and traditional exchanges that enable crypto trading must total up all payments made to each of their U.S. taxpayer customers and report those amounts to the IRS on 1099-DA forms.[9]
As a U.S. taxpayer, you may also use those same 1099-DAs to help you figure out the income side of your crypto tax checklist. But that’s just the starting point. What is reported on 1099s and 1099-DAs will not accurately reflect all crypto income.
When you receive 1099s, including 1099-DAs, you cannot automatically accept the numbers on them. The 1099-DA, for example, reports gross proceeds. As a result, it is then up to you, the taxpayer, to keep track of your actual income, and for 1099-DAs you need to know your crypto tax basis. The 1099-DA does not tell the whole story. It does not reflect actual cost basis; it can overstate tax liability; it does not keep track of transfers between wallets and crypto exchanges; it may only show a partial list of payments; and it is unlikely to accurately reflect the cost of the crypto.
What should you do if your 1099s are incorrect?
Taxpayers can address incorrect 1099s in various ways. Some taxpayers will work with their brokers to issue corrected 1099s, but this can be time-consuming and is often unsuccessful. Others enter the correct information on their tax returns and include a notation on their returns that the 1099 was incorrect but that the tax return actually reflects the correct numbers. This notation is important. This is because the IRS matches information on 1099s with tax returns. Any discrepancy will flag an audit or inquiry from the IRS. Making a notation will explain the discrepancy.
Other 1099s report crypto-related income. In what follows, I briefly discuss key 1099 forms that show where popular crypto-related activities line up with 1099 income sources: (1) transacting in crypto; (2) earning income and being compensated in crypto; and (3) investing or trading in crypto.
Transacting in crypto
1099-DA: Digital Asset Proceeds From Broker Transactions
The 1099-DA reports sales and exchanges of digital assets. It is the newest of the 1099 forms that brokers issue, and it is used to report on customer sales of digital assets. Crypto exchanges that file the 1099-DA have an obligation to report the taxpayer’s gross proceeds. To complicate things further, certain “noncustodial brokers”—like decentralized exchanges and unhosted wallet providers—are not required to report digital asset transactions on 1099-DAs.
IRS Notice 2024-57[10] is the center of the universe for guidance to those payors who are required to report on 1099-DAs. This Notice exempts certain transactions from the reporting requirements, such as wrapping and unwrapping token transactions; liquidity provider transactions; staking transactions; lending transactions; short sales; and notional principal contract transactions. Even though these transactions are not reflected on the 1099-DA, they might be “in scope” for other 1099 reporting requirements.[11]
Annual de minimis thresholds are provided for reporting sales or exchanges of certain types of digital assets. The de minimis threshold for qualifying stablecoins sold for cash or other qualifying stablecoins is $10,000; the threshold for specified nonfungible tokens (NFTs) is $600; and the threshold for processors of digital asset payments (PDAP) sales is $600.[12]
1099-DAs provide gross proceeds information, but do not report tax basis. As a result, taxpayers cannot simply put the numbers from the 1099 on their tax returns. Tax basis needs to be considered and related expenses must be determined in order to figure out gains or losses. The types of forms that are attached to substantiate income and expenses might include, for example, Form 8949 and Schedule D. Such forms and schedules must accurately reflect the taxpayer’s actual gains or losses, so any differences between them and the 1099s should be noted on these documents.
Earning income and compensation in crypto
Several 1099s are used to report income and compensation. These 1099s are likely to be familiar to entrepreneurs, freelancers, and gig workers.
1099 MISC: Miscellaneous Income
The 1099-MISC form reports certain payments made in the course of a trade or business, including rent, prizes, and other nonemployee compensation in amounts of at least $600; as well as royalties or broker payments in lieu of dividends or tax-exempt interest of at least $10.
1099-NEC: Nonemployee Compensation
The 1099-NEC form reports non-employee payments not covered in other 1099s in amounts that generally exceed $600, including payments made to independent contractors and freelancers in the course of conducting a trade or business. If you are a staker or a miner, income you receive for successfully adding data to the blockchain is most likely reported on 1099-NECs.
1099-K: Payment Card and Third Party Network Transactions
The 1099-K reports payments processed by third-party processing platforms such as Etsy, PayPal and Venmo, NFT marketplaces, and other platforms. It contains information about the number and gross amount of payments, but it does not provide information on individual transactions. Unlike 1099-MISC or 1099-NEC filings that are made directly by the business compensating the taxpayer, 1099-Ks report payments processed and collected by third parties on behalf of merchants and others. As a result, 1099-K payments can and do overlap with information that is also provided on the 1099-MISC and 1099-NEC. Taxpayers must compare all the 1099 forms they received for a given tax year to avoid overlap and get to the correct numbers.[13]
Investing or trading in crypto
Several 1099 forms address investment income, including the 1099-INT, 1099-DIV, 1099-CAP, and 1099-B.
1099-INT: Interest Income
The 1099-INT reports taxable and tax-exempt interest payments that exceed $10. This form gives the IRS a clear window into the U.S. taxpayer’s interest income.
1099-DIV: Dividends and Distributions
The 1099-DIV reports dividends paid to shareholders and other distributions from investments. This form is less common in the world of crypto, but a US customer receives 1099-DIVs for payments in excess of $10 from stock dividends, mutual funds, ETFs, and capital gain distributions.
1099-CAP: Changes in Corporate Control and Capital Structure
The 1099-CAP reports corporate changes in control and capital structure. It is used to report cash, stock, or property received with respect to corporate stock that reflects a change in a corporation’s capital structure. This form would be filed, for example, when a taxpayer held stock in a crypto company that was sold in the tax year.
1099-B: Proceeds from Broker and Barter Exchange Transactions
The 1099-B addresses sales of securities, commodities, and so-called “section 1256 contracts.” It is well known to those taxpayers who sell stock or securities, barter goods, or liquidate their holdings in Crypto Exchange-Traded Funds (ETFs) discussed below.
Crypto ETFs
Let’s wrap up on this look at 1099 reporting obligations by turning briefly to reporting for Crypto ETFs.[14] Crypto ETFs have become hot products recently because they can be held in a U.S. taxpayer’s brokerage accounts as well as in tax-exempt 401-k or IRA retirement accounts.[15] Crypto ETFs fall basically into five broad categories: Spot Crypto ETFs, Futures-based Crypto ETFs, Blockchain Equity ETFs, Covered Call Crypto ETFs, and Leveraged Crypto ETFs. Let’s turn to them in order.
Spot Crypto ETFs
Spot Crypto ETFs are typically structured as grantor trusts, where the trust holds digital assets and the investors/owners hold ETF shares that represent undivided ownership in the underlying digital assets. In addition, Spot Crypto ETFs are occasionally structured as Widely Held Fixed Investment Trusts (WHFITs).
When the ETF purchases and sells spot crypto holdings, this generates gains or losses that flow through the grantor trust to its unit holders. These distributions (as reflected on a 1099-DIV) rarely consist of ordinary dividends and more frequently consist of returns of capital. When investors and traders sell their shares in these ETFs, they receive capital gain or loss on the difference between their cost basis and the amount they receive from selling their ETF shares. Such sales qualify for preferential long-term capital gain rates if they hold the units for more than a year. Gross proceeds from the sale of the ETF shares are reported on a 1099-B.
Taxpayers who own WHFIT shares are taxed on their pro-rated share of the trust’s gross income, and typically receive a Consolidated 1099 form[16] instead of the individual 1099-INT, the 1099-B, 1099-MISC and the 1099-DA forms.
Futures-based Crypto ETFs
Futures-based Crypto ETFs are typically structured as regulated investment companies (RICs), registered under the U.S. securities laws, and taxed under Subchapter M of the Internal Revenue Code (Code).[17] These ETFs hold futures contracts that qualify as section 1256 contracts that are subject to two special tax rules: the 60/40 Rule and the Mark-to-Market Rule. Under the 60/40 Rule, gains and losses are taxed at 60 percent long-term and at 40 percent short-term capital gain or loss. Under the Mark-to-Market Rule, any positions that remain open on the last business day of the taxable year are taxed as if they were sold. To maintain RIC status, the ETF must make all required RIC distributions, with annual capital gain distributions reported on a 1099-DIV form. Distributions from a Futures-based Crypto ETF, however, do not reflect section 1256 gains or losses because RIC income is reflected on a 1099-DIV as short-term capital gain.
When they sell their shares, taxpayers will likely receive a 1099-B, or a consolidated 1099 that bundles their 1099-B, 1099-DIV, and 1099-INT forms. If the Crypto ETF is not a RIC but it is, instead, structured as a commodity-pool, the fund owners may receive a different type of tax form (a Schedule K-1) that is used to report income from partnerships. Section 1256 contract gains and losses can flow through to partners.
Blockchain Equity ETFs
Blockchain Equity ETFs are typically structured as RICs, holding equity interests in crypto-related companies, such as crypto exchanges, De-Fi projects, crypto miners, and blockchain infrastructure companies. Blockchain Equity ETFs receive a more typical tax treatment, rather than anything that is specific to crypto: 1099-DIVs to report their RIC distributions, a 1099-B if they sell their ETF shares, and a 1099-INT if they earned interest on cash that was not invested.
Covered Call Crypto ETFs
Covered Call Crypto ETFs hold crypto assets and sell call options against their underlying crypto asset positions. These ETFs seek to earn option premiums when they sell the call options, reporting trading gains and losses plus option premiums.
ETF owners receive a 1099-DIV that reflects option premiums, trading gains, and derivatives income. Occasionally there might be capital gain distributions and returns of capital reflected on the 1099-DIV. Such ETF holders receive a 1099-B when they sell their shares, which reflects gross proceeds. For convenience, some brokers deliver a Composite 1099 that addresses the information otherwise available in the 1099-B, 1099-DIV, and 1099-INT (if any).
Leveraged Crypto ETFs
Most Leveraged Crypto ETFs are registered as RICs. They enter into derivative positions to increase, that is, “leverage” their positions. These ETFs generate income by actively trading futures contracts and swaps and by “rebalancing” the ETF’s portfolio. Because assets turn over quickly, significant amounts of short-term trading gains and ordinary income (from swaps) are generated at the ETF level.
As RICs, such ETFs are required to make appropriate RIC distributions. ETF shareholders receive a 1099-DIV to report their ordinary income and capital gain distributions, and they receive a 1099-B when they sell their ETF shares.
Tax-Advantaged Retirement Accounts
Tax-advantaged retirement accounts like IRAs and 401(k)s can hold certain crypto directly and through entities such as ETFs, IRA-owned limited liability companies, and partnerships. The issues of disqualified assets (the type of crypto); prohibited transactions (transactions generally related to conflicts of interest or self-dealing); and unrelated business taxable income (UBTI) need to be considered in the context of crypto being held in retirement accounts.
Retirement accounts can hold property—and since crypto is “property” it can be held in certain retirement accounts. This stated, digital assets being held directly in a U.S. tax-advantaged retirement account must be of a kind that is available on a US-regulated exchange (for example, an exchange such as Coinbase) and supported by an exchange partner or a specific custodian. Cryptocurrencies are generally held in “self-directed IRAs” (SDIRAs) or Solo 401(k)s; and are generally not available in standard 401(k) plans at the time of this writing.
It should be noted that these types of “Alternative Asset IRAs” fall under the purview of Internal Revenue Code Section 4975, rather than the Employee Retirement Income Security Act of 1974 (ERISA). They come with risks, in addition to possible unanticipated tax consequences. Account owners also need to be concerned about fraud.[18]
An IRA account must address other special circumstances when it holds crypto positions directly. As a starting point, the owner of the account cannot have personal custody of the crypto. Owners are treated as “disqualified persons” under Code Section 4975 so they cannot take possession of, or have control over the crypto outside of the retirement account. Violations result in prohibited transactions where the entire IRA account can become taxable. Another concern is with UBTI under Code Section 511, which is subject to taxation. Although crypto is not a “disqualified asset,” non-fungible tokens (NFTs) are treated as “collectibles” under Code Section 408(m)(2). For a discussion about treatment of NFTs as collectibles, see my article, IRS Takes a New Approach to NFT Taxes and ‘Collectibles.’[19]
Taxpayers also should be aware that U.S. law is in a period of transition with respect to requirements for fiduciaries of 401(k) defined contribution plans at the precise time of this writing. [20]
In August 2025, President Trump issued Executive Order 14330, “Democratizing Access to Alternative Assets for 401(k) Investors,” that requires federal government agencies to re-evaluate the definition of “qualified assets” that can be included in defined contribution plans. In January 2026, the Securities and Exchange Commission (SEC) Chair Paul Atkins reaffirmed his support for opening up the 12.5 trillion dollar 401-k market to crypto investments.[21]
In response to Executive Order 14330, The Employee Benefits Security Administration issued a proposed rule in March 2026,[22] “that clarifies, and provides a safe harbor for, a fiduciary’s duty of prudence under the Employee Retirement Income Security Act of 1974 (ERISA) in connection with selecting designated investment alternatives for a participant-directed individual account plan, including asset allocation funds that include alternative assets.”
If enacted as proposed, this regulation will change the landscape for defined contribution plans, proposing a very broad standard for plan fiduciaries by granting them “maximum discretion to select investments to further the purposes of the plan” and “adopts this foundational principle, providing, in relevant part, that section 404(a)(1)(B) of ERISA ‘does not require or restrict any specific type of designated investment alternative.’”
Taxpayers receive 1099-Rs for distributions from pension, annuity, and retirement accounts.
Conclusion
In this Part II we considered the definition of digital assets and the tax character of crypto as property. We looked at a number of IRS forms with a focus on 1099s, addressing the new 1099-DA, where there has been a lot of confusion over the scope and use of 1099-DA forms.
1099 forms provide the IRS with important information about sources of income, but they cannot be relied upon to directly drop numbers into a tax return. Because the IRS compares 1099 forms with information set out on the appropriate tax returns, taxpayers who receive 1099s with incorrect information must either obtain corrected 1099s or report the discrepancies and provide the correct information on their tax returns.
I went on to look at some popular digital asset investments through ETFs. New Crypto ETFs are being proposed and receive regulatory approval at a very fast pace at present, and this field is literally changing by the week. Crypto ETFs are typically structured as grantor trusts or as RICs, which depends on the types of digital assets being held and the ETF’s investment objectives.
I concluded this part of the series with a review of U.S. retirement accounts. Direct crypto investments and entities that own crypto can be held in both U.S. taxpayer’s brokerage accounts as well as in tax-exempt 401-k and certain IRA retirement accounts. With that said, I noted that the related issues are complex when it comes to disqualified assets, prohibited transactions, and UBTI. Times are changing and so are applicable laws. It is important to stay on top of new developments.
Join me next for Part III, How Do We Get Out? as we conclude this series with a discussion about tax returns and how to answer the ever-important “digital asset question.”
