The IRS treats cryptocurrency as property and you are required to track every single transaction you make along with calculating your capital gain or loss. Let us say that you decided to use crypto to buy a cup of coffee at your local coffee shop. It is not enough to just save the receipt. You need to track the amount of capital you have gained or lost for each transaction. Obviously, that is challenging to do. You will need to know the cost basis for each transaction. You must also file Form 8949 with the IRS, on which you will need to provide specific information, including the cryptocurrency in question, when you bought it, when you sold it/disposed of it, the amount you earned in the deal, your cost basis, and the total gain or loss you incurred. It's important to note that this process must be repeated for every single purchase or sale resulting in a taxable event. If you use crypto again to buy another cup of coffee, that would be another taxable event. Most people do not use Bitcoin to get their morning java, and for good reason.
While the complex process above might make it seem different, cryptocurrency-related income is actually taxed just like regular income at the end of the day. So, what is considered crypto income? If you mine crypto and receive rewards, that is considered income. Staking crypto also results in taxable income, as does lending it and receiving interest on your digital currency. Of course, if someone pays you for goods or services in cryptocurrency, that is also considered income.
In addition to your income from cryptocurrency being taxed, you also need to consider capital gains taxes. As mentioned, the IRS treats crypto like real estate (or stocks, if you prefer), and you will be responsible for capital gains after disposing of it. Currently, the capital gains taxes for crypto gains are the same as for stock gains. Moreover, if you purchased and sold an NFT, this is a taxable event and may be taxed at a higher rate. The IRS may classify an NFT as a collectible.
While cryptocurrency has been around for many years at this point, it is still relatively new for many people. Understanding how it is taxed, as well as what the government considers taxable and nontaxable events, is critical to using this financial tool to your benefit and not to your detriment.
As a disclaimer, please note that the IRS still has not issued clear guidance when it comes to crypto, specifically DeFi and NFTs. Guidance to some of the questions will come from case law and rules for similar assets/investments. Please speak with your tax professional before engaging in any transaction as this is not formal tax advice.