Need to Know Tax › Questions everyone gets asked
Digital assets
The digital asset question
One yes-or-no box on every Form 1040, signed under penalty of perjury, that most people answer without reading. For the ones who own crypto, the honest answer is yes more often than they expect, and what follows is a set of rules that are simple to state and tedious to apply.
Right under your name, Form 1040 asks whether you received a digital asset as a reward, award, or payment, or sold, exchanged, or otherwise disposed of one during the year. Everyone answers it. For most people the honest answer is no. For the ones who own crypto, it is yes more often than they expect, because “dispose of” is broader than “sell for dollars,” and because the IRS now gets a form.
What makes the answer yes
A digital asset is anything of value recorded on a blockchain: Bitcoin, Ether and other cryptocurrencies, stablecoins, and NFTs. The question is about what you did, not what you own. It asks whether, during the year, one came in as income or went out in a transaction.
| Yes, if you | No, if you only |
|---|---|
| Sold crypto for dollars | Bought crypto with dollars and held it |
| Traded one coin for another, including into or out of a stablecoin | Moved crypto between wallets or accounts you own |
| Paid for anything with crypto, from a coffee to a car | Held crypto in a brokerage or retirement account that did no trading |
| Sold, minted for sale, or traded an NFT | Bought an NFT with dollars and kept it |
| Received crypto as pay, as a staking or mining reward, from an airdrop, or as a gift you then sold | Received crypto as a gift and still hold it |
A yes costs nothing by itself; it means there is a transaction on the return to go with it. A no from someone who traded is the problem, because the IRS increasingly knows otherwise.
Crypto is property
It is not currency, so it is taxed like stock. Each time you dispose of a digital asset you compute a gain or loss: what you received, minus what you paid for it, including fees. The result goes on Form 8949 and flows to Schedule D. Held more than a year, the gain is long-term and taxed at the favorable rates, 0%, 15% or 20%; a year or less, it is taxed like wages. Losses offset gains, and up to $3,000 a year of what is left offsets other income, with the rest carried forward. The wash-sale rule does not currently apply to crypto (verify), so a loss can be realized and the coin bought back at once.
Trading Bitcoin for Ether is a sale of Bitcoin at its value that moment. Converting to a stablecoin is a sale. Paying for dinner with crypto is a sale of the crypto, and if the coin went up since you bought it, you have a gain on your meal.
When crypto comes to you without your buying it, it is income first and property second. Staking and mining rewards, airdrops, and wages paid in crypto are ordinary income at the dollar value on the day you gain control of the coins. That value becomes your basis for the later sale.
Worked example: one year, five events, four of them taxable
| Event | Is it a disposal or income? | Result |
|---|---|---|
| Jan: bought 0.5 Bitcoin for $40,000 | No | Basis $40,000 |
| Apr: received $600 of staking rewards on Ether | Income | $600 ordinary income; basis $600 in the new Ether |
| Jul: swapped 0.2 Bitcoin (basis $16,000) into a stablecoin worth $22,000 when the market wobbled | Disposal | $6,000 short-term gain, taxed like wages |
| Oct: paid for a $3,000 laptop with 0.025 Bitcoin (basis $2,000) | Disposal | $1,000 short-term gain |
| Dec: sold the $600 of Ether for $450 | Disposal | $150 short-term loss |
| On Form 8949 | $6,850 net short-term gain, plus $600 of income; about $1,500 federal at 22% and $330 Colorado |
The owner thought of this year as “I still have my Bitcoin.” Three of the five lines are sales. The stablecoin swap is the one people miss most, and when the market is down it is just as often a useful loss.
Form 1099-DA
For years the IRS relied on the honor system. Now it gets a form. Exchanges and brokers report what you sold and for how much, starting with 2025 transactions, and the IRS matches it against your return the way it matches stock sales. For 2025 the form showed the sale price only; without a cost basis from you, the IRS assumes the whole sale price was gain. From 2026, brokers add basis for coins bought in 2026 or later. Coins bought earlier, or that moved onto the exchange from a private wallet, still show no basis, and your own records fill the gap. Basis is tracked account by account, not as one pool (verify), so the same coin bought at two exchanges has two basis records. Download the exchange’s transaction history every year; exchanges close and purge old data.
Behind the scenes
A preparer does not take the box at face value. If a Form 1099-DA arrives, or last year’s return had an 8949 full of coin tickers, the question gets asked again. More than once the answer has been that the client just swapped some into a stablecoin when the market dropped. That swap is a sale. It gets reported, and it often produces a useful loss nobody knew they had. The other recurring job is the basis for a coin bought in 2021 on an exchange that no longer exists: a screenshot from the time, a bank record of the dollars sent, anything dated.
The Colorado side
Colorado has nothing separate to compute. Crypto gains and income flow into federal taxable income and are taxed at the flat 4.40%, with no preferred rate for long-term gains, so the $6,850 in the example costs about $300 of state tax whether short- or long-term. Colorado does accept cryptocurrency for tax payments through a third-party processor (verify), which is itself a disposal of the coin used.
What to bring your preparer
- Every Form 1099-DA, and the exchange’s full transaction history for the year as a download
- For coins bought before 2026 or moved in from a wallet: records of what you paid and when
- Staking, mining and airdrop income, with the dollar value on the day received (most exchanges report this)
- Any purchases made with crypto, with the date and the dollar price paid
- Wallet-to-wallet transfers, so they are not mistaken for sales
- Last year’s Form 8949, for carryover losses and the basis of what is still held
Questions people ask
I bought some Bitcoin and just hold it. Do I check yes?
No. Buying with dollars and holding is the one thing the question excludes. Check no, and keep the purchase record for the year you sell.
I moved my coins from Coinbase to a hardware wallet. Is that a sale?
No. A transfer between accounts you own is not a disposal. Keep the transfer record, because the exchange’s 1099-DA will show the coins leaving and the wallet has no reporting at all.
I only trade crypto for other crypto, never for dollars. Any tax?
Every trade is a sale of the coin given up, at its dollar value that moment, with a gain or loss. A busy trader can have hundreds of lines on Form 8949 without ever touching dollars.
My 1099-DA shows $30,000 of sales but I lost money. What now?
Report each sale with its basis on Form 8949. The 1099-DA shows proceeds; your records show cost. Without them the IRS treats the $30,000 as gain, and the letter follows two years later.
I was paid in crypto for freelance work. How is that taxed?
As ordinary income, the same as a check, at the dollar value when received, with self-employment tax. That value is your basis; selling later is a second, separate event.
Download the exchange’s transaction history every year
Exchanges close and purge old data, and a coin bought in 2021 and sold in 2026 shows no basis on the 1099-DA. Without your own record, the IRS treats the whole sale price as gain.