10.4 Tax Basics and Importance of Record-Keeping

Cryptocurrency taxation can seem daunting for beginners, but understanding the fundamentals is crucial for compliance and avoiding penalties. As of September 2025, cryptocurrencies are treated as property (not currency) for tax purposes in most jurisdictions, meaning transactions can trigger capital gains, income taxes, or other liabilities. The global crypto market's growth to over $2.5 trillion has prompted stricter rules, with losses from non-compliance estimated at billions annually.

We'll focus on U.S. rules (as they're comprehensive and influential) while touching on global variations. By the end, you'll know how to track transactions and stay compliant.

Understanding Crypto Taxes: The Basics

Cryptocurrencies are taxed similarly to stocks or property, not cash. This means you pay taxes on profits from sales or earnings from activities like mining. For beginners, taxes fall into two main categories: capital gains (from selling or trading) and ordinary income (from rewards or payments). In 2025, there's no minimum threshold—all transactions must be reported, even if they result in losses, which can offset gains. The IRS emphasizes that digital assets include cryptocurrencies, stablecoins, and NFTs, all treated as property. Globally, taxes aim to prevent evasion, with initiatives like the OECD's Crypto-Asset Reporting Framework (CARF) requiring exchanges to report user data starting in 2027 in many countries. Beginners should note that ignorance isn't a defense—penalties can reach 75% of unpaid taxes plus interest.

Types of Crypto Taxes

Taxes depend on how you acquire, hold, and dispose of crypto. Capital gains apply to investments, while income taxes cover earnings.

• Capital Gains Tax: Applies when you sell or trade crypto at a profit. Short-term (held <1 year) is taxed at ordinary income rates (10-37% in the U.S.); long-term (>1 year) at 0-20%. Losses can offset gains, reducing your bill.
• Ordinary Income Tax: For mining, staking rewards, airdrops, or payments in crypto. Taxed at your income bracket (up to 37% in the U.S.). In 2025, staking rewards are taxed upon receipt, even if locked.

Taxable Events in Cryptocurrency

Cryptocurrency is generally treated as property—not currency—for tax purposes in most countries, including the U.S., U.K., Australia, and the EU. This means that many activities involving crypto can trigger a taxable event, just as if you were selling or exchanging stocks or other assets.

Understanding which activities are taxable (and which aren’t) is essential for staying compliant and avoiding penalties. Below, we break down the most common taxable and non-taxable events in the crypto space.

Common Taxable Events

These are actions that typically create a tax obligation, either in the form of capital gains/losses or ordinary income, depending on the nature of the transaction.

1. Selling Crypto for Fiat Currency

Selling your cryptocurrency for a traditional currency like USD, GBP, or EUR is a disposal event and triggers a capital gain or loss. You’ll owe tax on the difference between what you paid for the crypto (your cost basis) and what you sold it for.

Example:
If you bought 1 BTC for $20,000 and later sold it for $30,000, you would have a $10,000 capital gain.

2. Trading One Cryptocurrency for Another

Swapping one cryptocurrency for another—such as exchanging ETH for BTC—is also considered a disposal. The market value of the crypto you receive at the time of the trade is used to calculate gain or loss relative to the cost basis of the crypto you gave up.

Even though no fiat currency is involved, this is still a taxable event in most jurisdictions.

3. Using Crypto to Purchase Goods or Services

Paying for products or services using crypto is considered equivalent to selling it. The value of the crypto at the time of the transaction must be compared to its acquisition cost to calculate a capital gain or loss.

Example:
If you bought ETH at $1,500 and used it to buy a laptop when ETH was worth $2,000, you’d realize a $500 capital gain.

4. Earning Crypto as Income

Receiving crypto through various means—such as:

• Payment for freelance or employment work
• Mining or staking rewards
• Airdrops
• Play-to-earn gaming rewards
• Hard forks

—all constitute income at the time of receipt. The fair market value of the crypto on that date is taxed as ordinary income, and this value also becomes your cost basis for future capital gains/losses.

5. Gifting or Donating Crypto

In the U.S., gifting crypto above the annual exclusion limit (e.g. $18,000 in 2025) may trigger a gift tax for the giver.
Donating crypto to a qualified charitable organization may be tax-deductible, often based on the crypto’s fair market value at the time of donation.

Note: The rules around gifts and donations can vary significantly by jurisdiction.

6. DeFi, NFTs, and Other Complex Scenarios

Emerging areas like decentralized finance (DeFi) and NFTs also fall under tax scrutiny:

• DeFi activities (e.g. yield farming, liquidity provision) may result in either income or capital gains, depending on how the assets move or grow.
• NFT sales often result in capital gains for investors or income for creators.
• Wrapped tokens, lending/borrowing protocols, and rebase tokens may each have unique tax implications, and guidance continues to evolve.

Non-Taxable Events

Some crypto-related actions do not trigger tax immediately—but they still require proper record-keeping to track cost basis for future use.

1. Buying Crypto with Fiat

Purchasing crypto with cash (e.g. buying BTC with USD or GBP) is not taxable. However, the purchase price becomes your cost basis, which you’ll need later when calculating capital gains upon disposal.

2. Transferring Crypto Between Your Own Wallets or Accounts

Moving crypto between wallets or exchanges that you control is not a taxable event, as long as you’re not exchanging it for another asset or paying fees in crypto.

Note: If you do pay a fee using crypto (e.g. gas fees on Ethereum), that may be a taxable disposal of a small portion of the asset.

3. Simply Holding Crypto

Holding cryptocurrency without selling, trading, or spending it does not generate any tax. However, your unrealized gains (or losses) still exist on paper—and will be relevant when you eventually dispose of the asset.

Calculating Your Crypto Taxes

Understanding how to calculate taxes on your crypto is essential for staying compliant and avoiding surprises during tax season. While crypto can feel complicated, the core principle is simple: when you sell, trade, or use crypto, you may owe capital gains tax, and when you earn crypto, it may be considered income.

To calculate your tax liability, you need to know two things for each taxable event:

1. Your cost basis (how much you paid for the asset)
2. The fair market value (FMV) at the time you sold, swapped, or spent the asset

Your gain or loss =
Sale price (FMV at disposal) – Cost basis (original price + fees)

Example

If you bought 1 ETH for $1,200 and later sold it for $1,800:

• Cost basis = $1,200
• Sale price = $1,800

Capital gain = $600

Cost Basis Methods

Your cost basis method determines which coins you’re “selling” first if you hold multiple units of the same asset bought at different times and prices. This directly affects your capital gains or losses.

There are several accepted methods. You must choose one and apply it consistently. If you don’t specify, the IRS defaults to FIFO.

FIFO (First In, First Out)

• You sell your oldest coins first.
• Often results in higher gains during a bull market.
• Default method used by most tax tools and the IRS.

LIFO (Last In, First Out)

• You sell your newest coins first.
• Can reduce tax in a falling market, where recent purchases were at higher prices.

Specific Identification

• You choose exactly which coins to sell, based on transaction IDs or wallet history.
• Most flexible but requires detailed, verifiable records.
• You must identify:
  • Date/time acquired
  • Cost basis of each unit
  • Proof of sale of specific units

HIFO (Highest In, First Out)

• You sell the coins with the highest cost basis first.
• Often minimizes gains, which may reduce your tax bill—commonly used by advanced investors.

Note: In 2025, the IRS will disallow “universal wallet” pooling, meaning you must calculate gains and losses per wallet or account, not by combining all holdings across platforms. This makes record-keeping even more important.

Fair Market Value (FMV)

Fair Market Value is the asset’s value in your local currency (e.g. USD) at the time of the transaction. You’ll use this to determine both:

• Capital gains (when disposing of crypto)
• Income (when receiving crypto)

How to find FMV:

• For trades and sales: Use exchange price at the time of the transaction.
• For income (e.g. mining, staking, airdrops): Use the value upon receipt.
• For historic data: Tools like CoinMarketCap and CoinGecko offer historical price charts.

Reporting Crypto Taxes

Crypto taxes must be reported annually in your tax return, just like income from stocks or other investments. Even if you didn’t make a profit overall, you’re still required to report your transactions.

For U.S. taxpayers:

• You must answer "Yes" or "No" to the digital assets question on Form 1040:
  “At any time during the year, did you receive, sell, exchange, or otherwise dispose of any digital asset?”

U.S. Reporting Forms

• Form 8949 & Schedule D: Report capital gain and losses from selling, swapping, or spending crypto.
• Schedule 1 (Form 1040): Report crypto earned as income (e.g. mining, staking, freelance work).
• Form 1099-DA: New for 2025—brokers must send this to you and the IRS with your crypto sales data.
• Form 709: For gifts of crypto that exceed the annual exclusion (e.g. over $18,000 in 2025).

Global Reporting Trends

Outside the U.S., crypto tax reporting is evolving quickly:

• EU: Starting in 2026, crypto platforms will report user transactions under DAC8.
• OECD’s CARF (Crypto-Asset Reporting Framework):
  From 2027, 48+ countries will automatically exchange crypto account and transaction data, similar to how bank account info is shared under the Common Reporting Standard (CRS).

This means tax authorities around the world will increasingly know who owns what crypto, where, and how it moves—making accurate self-reporting more critical than ever.

The Importance of Record-Keeping

One of the most overlooked—but critically important—aspects of crypto taxation is accurate record-keeping. Because blockchain transactions are pseudonymous and decentralized, tax authorities (like the IRS, HMRC, or ATO) do not automatically receive your crypto transaction data. That responsibility falls on you, the taxpayer.

Whether you’re an occasional trader or a high-frequency investor, keeping detailed, organized records is the only way to ensure you can accurately report gains, losses, and income—and defend those numbers in the event of an audit.

Why Record-Keeping Matters

Without proper documentation, you won’t be able to calculate your cost basis (the original value of your crypto), determine capital gains or losses, or provide evidence of compliance if questioned by tax authorities.

In the U.S. for example:

• The IRS requires records to be kept for at least 3 years, but up to 7 years for situations involving capital losses or underreported income.
• As of 2025, new rules under the Infrastructure Investment and Jobs Act and upcoming broker reporting regulations mean exchanges will send automated reports to the IRS. Any mismatch between your self-reported data and third-party reports can trigger audits or penalties.
• In 2024 alone, 15% of all crypto-related audits were linked to incomplete or inconsistent record-keeping, according to IRS enforcement statistics.

What to Record

To ensure you can accurately reconstruct the fair market value (FMV), gains, and cost basis of your crypto assets, you should keep detailed records of every transaction, including:

• Date and time of the transaction (when crypto was bought, sold, swapped, or earned)
• Type of transaction (buy, sell, swap, earn, gift, donation, etc.)
• Crypto asset involved (e.g. BTC, ETH, SOL)
• Quantity of crypto transacted
• Fair market value (FMV) of the crypto in your local currency at the time
• Cost basis – what you originally paid for the asset, including any fees
• Transaction fees – gas fees, platform fees, or brokerage commissions (these may be deductible in some jurisdictions)
• Wallet or exchange used – including sender/receiver addresses
• Counterparty information, if known (especially for P2P trades or off-exchange transfers)

Some jurisdictions require records to be kept for 5–7 years, so digital backups and proper formatting are essential.

Tools for Record-Keeping

Manually tracking crypto transactions in spreadsheets is possible for low-volume users, but as activity increases, manual tracking becomes error-prone and inefficient. Fortunately, there are many tools available to streamline the process.

Recommended Tools

• Crypto tax software: Tools like CoinLedger, Koinly, TaxBit, and CoinTracker allow you to connect wallets and exchanges, automatically calculate gains/losses, and generate tax reports.
• Exchange exports: Most platforms like Coinbase, Binance, and Kraken allow you to download CSV files with your full transaction history.
• Blockchain explorers: Use tools like Etherscan or Blockchain.com Explorer to verify on-chain transactions and view public transaction histories.
• Spreadsheets: Suitable for basic activity, as long as you include all relevant details (date, time, type, value, fees, etc.). Always cross-check manually logged entries with exchange or wallet data to avoid inconsistencies.

Global Variations in Crypto Taxes

Crypto taxation is not globally standardized. Each country treats digital assets according to its own legal framework, and the rules can vary significantly depending on where you live, trade, or hold residency. While many nations follow similar principles—such as treating crypto as property or assets rather than currency—the rates, reporting obligations, and enforcement intensity can differ dramatically.

United States (IRS)

The Internal Revenue Service (IRS) treats cryptocurrency as property, not currency. This means crypto transactions are subject to capital gains tax when assets are sold, traded, or spent. If you receive crypto as payment, through mining, or as airdrops, it is taxed as ordinary income based on the fair market value at the time of receipt.

Key Details:

• Form 1040 now includes a mandatory “Digital Assets” question requiring taxpayers to declare crypto activity.
• Capital gains apply on disposals (e.g., selling BTC, swapping ETH for USDC, using crypto for purchases).
• The IRS requires record retention for 3–7 years, depending on the type of activity.
• Enforcement is increasing: the IRS uses blockchain analytics tools and data from exchanges to detect non-compliance.

Starting in 2025, U.S.-based brokers and exchanges will be required to issue Form 1099-DA under the new crypto broker reporting rules.

United Kingdom (HMRC)

Her Majesty's Revenue and Customs (HMRC) also treats crypto as property, not currency. Tax obligations primarily arise from capital gains, although crypto received through income-generating activities (like mining, staking, or employment) is taxed as income.

Key Details:

• Taxable events include selling crypto, swapping assets, and using crypto to purchase goods or services.
• Income received in crypto must be valued in GBP at the time of receipt and reported as income.
• HMRC requires records for each transaction, including:
  • Date and type of transaction
  • Market value in GBP
  • Quantity and type of crypto
  • Purpose of transaction
• There is currently no specific crypto tax form—reporting is done through Self Assessment tax returns.

Australia (ATO)

The Australian Taxation Office (ATO) treats crypto as a capital gains tax (CGT) asset. Individuals are taxed on gains when crypto is sold, swapped, or used for purchases. Crypto received as income—such as through work, staking, or mining—is subject to income tax at your marginal rate.

Key Details:

• Crypto-to-crypto trades are considered taxable events.
• All crypto activity must be recorded and retained for at least 5 years.
• CGT rates range from 0% to 45%, depending on your income and holding period.
• The ATO uses data-matching tools and partners with exchanges to identify discrepancies in tax filings.

European Union

The EU is rapidly moving toward more coordinated crypto tax rules under the Markets in Crypto-Assets (MiCA)regulation and the Directive on Administrative Cooperation (DAC8).

Key Details:

• Under MiCA, crypto service providers will face increased regulatory scrutiny, including consumer protection and licensing rules.
• DAC8, set to roll out by 2026, will require crypto platforms operating in the EU to automatically report users’ transactions to tax authorities.
• Tax treatment varies by country. For example:
  • Germany: Crypto held longer than one year may be tax-free; shorter-term gains taxed up to 45%.
  • France: Flat tax of 30% applies to gains.
• EU-wide harmonization will continue under the OECD’s Crypto-Asset Reporting Framework (CARF)beginning in 2027.

Canada

In Canada, the Canada Revenue Agency (CRA) treats crypto as a commodity, not legal tender. This results in different treatment based on the nature of the activity:

Key Details:

• Most personal crypto gains are taxed as capital gains, with 50% of the gain included in taxable income.
• If trading is frequent or business-like, income may be taxed as business income, fully taxable at marginal rates.
• From 2024, enforcement of crypto-related income and gains is increasing, with more emphasis on distinguishing between investor and trader status.

India

India has introduced one of the most stringent crypto tax regimes globally.

Key Details:

• A flat 30% tax applies to all crypto gains, with no deductions allowed other than the acquisition cost.
• A 1% tax deducted at source (TDS) is imposed on all crypto transfers above certain thresholds.
• Losses from crypto transactions cannot be offset against other gains.
• These rules apply even if the platform is located offshore or if the assets are transferred between wallets.

Crypto Tax Havens

Several countries offer favorable or zero-tax environments for crypto investors and digital asset businesses. These jurisdictions are often used for strategic tax planning, but residency and reporting rules apply.

Popular Crypto-Friendly Jurisdictions:

• United Arab Emirates (UAE): No personal income tax; favorable treatment for crypto businesses in free zones.
• Cayman Islands: 0% capital gains and income tax, but strict residency and business regulations.
• Portugal: Long considered crypto-friendly; however, since 2023, crypto gains may be taxed unless assets are held for over 365 days.

Global Harmonization Efforts: The OECD’s CARF

To combat tax evasion and streamline global crypto tax reporting, the OECD is launching the Crypto-Asset Reporting Framework (CARF), set to be implemented in over 48 jurisdictions starting in 2027.

CARF will:

• Require crypto service providers to collect and report user transaction data to tax authorities.
• Enable automatic exchange of information between countries, similar to the Common Reporting Standard (CRS)used for bank accounts.
• Standardize reporting of crypto-to-crypto trades, stablecoin use, and even certain DeFi transactions.

This marks a major shift toward global transparency in crypto taxation.