Cryptocurrency adoption has surged in recent years, and with it comes increased scrutiny from tax authorities. The IRS has been tightening enforcement on crypto tax compliance, and 2025 is expected to be a landmark year with the introduction of Form 1099-DA, which will require crypto exchanges and brokers to report user transactions to the IRS.
This means the IRS will have greater visibility into crypto transactions than ever before, making it critical for crypto investors and traders to ensure their tax filings are accurate. Unfortunately, many taxpayers make crypto tax mistakes that could lead to audits, penalties, or even criminal investigations.
To help you stay compliant, we’re covering seven of the most common crypto tax mistakes that could raise red flags and increase your risk of an IRS audit.
1. Ignoring Form 1099-DA and Mismatched Reporting
What is Form 1099-DA?
Starting in 2025, U.S.-based crypto exchanges and brokers will issue Form 1099-DA, a tax form that reports user transactions, including sales, trades, and potentially other taxable events, to the IRS. Similar to how stock brokers report stock trades via Form 1099-B, this new form will provide the IRS with direct insight into crypto activity.
Why is this a problem?
If you fail to report taxable crypto transactions or report incorrect amounts, but the IRS receives conflicting information from exchanges, your return could be flagged for further review or audit. The IRS uses automated matching systems to identify discrepancies between taxpayer filings and third-party reports.
How to avoid this mistake:
- Compare your 1099-DA with your own transaction records before filing your tax return.
- Ensure all taxable transactions are reported, even if they don’t appear on the form (e.g., self-custodied transactions or DeFi activity).
- Verify the accuracy of cost basis and transaction details, as exchanges may not always provide complete or correct data.
2. Misreporting Crypto-to-Crypto Trades
Why does crypto-to-crypto trading trigger taxes?
One of the most common crypto tax mistakes is failing to report crypto-to-crypto trades. Many investors incorrectly assume that swapping one cryptocurrency for another (e.g., BTC for ETH) is not a taxable event. However, under U.S. tax law, this is treated as a disposal, requiring taxpayers to report capital gains or losses.
How do you calculate gains?
Every crypto-to-crypto trade requires determining the cost basis of the asset disposed of and the fair market value of the asset received at the time of the trade.
Example:
- You bought 1 BTC for $30,000.
- You later traded that 1 BTC for 15 ETH when BTC was worth $45,000.
- Your capital gain is $45,000 – $30,000 = $15,000 (taxable).
How to avoid this mistake:
- Use crypto tax software to track and calculate gains across all crypto transactions.
- Report all crypto-to-crypto swaps, even if no fiat (USD) is involved.
- Keep detailed transaction logs to ensure accurate reporting.
3. Failing to Track Cost Basis Correctly
Why does cost basis matter?
The cost basis of a crypto asset is the original purchase price plus any transaction fees. Tracking cost basis is crucial for calculating capital gains or losses correctly when selling or trading crypto.
Common mistakes:
- Failing to track cost basis when transferring assets between wallets.
- Losing historical transaction records, leading to miscalculations.
- Using incorrect or disadvantageous cost basis methods (e.g., FIFO vs. specific identification).
How to avoid this mistake:
- Track the cost basis of all crypto purchases and transfers to avoid discrepancies.
- Choose and consistently use a cost basis allocation method (e.g., FIFO, LIFO, or specific identification) throughout the year.
- Keep records of wallet-to-wallet transfers, as these are not taxable but may impact cost basis tracking (e.g., the payment of gas fee which is a taxable event).
4. Not Reporting DeFi Transactions
Why are DeFi transactions taxable?
Many crypto investors engage in DeFi (Decentralized Finance) activities without realizing they may be taxable. Transactions such as liquidity providing, yield farming, staking, and borrowing have unique tax implications.
Common taxable DeFi events:
- Providing liquidity – If you receive a new token (e.g., LP token) that has value in return, it’s a taxable event.
- Yield farming rewards – Often classified as ordinary income upon receipt.
- Borrowing with collateral – Not taxable when borrowed, but taxable if collateral is liquidated.
How to avoid this mistake:
- Classify DeFi transactions properly (capital gains vs. income).
- Use crypto tax software to track complex DeFi interactions, as DeFi exchanges usually don’t provide DeFi tax reports.
- Stay updated on IRS guidance, as DeFi taxation is evolving.
5. Forgetting to Report Staking and Mining Rewards
How are staking and mining taxed?
Crypto earned from staking and mining is treated as taxable income upon receipt, based on the asset’s fair market value in USD at that time.
Common mistakes:
- Reporting staking rewards only when sold instead of when received.
- Failing to track mining equipment deductions or expenses.
- Ignoring self-custodied staking rewards, assuming they are not taxable.
How to avoid this mistake:
- Report all staking and mining rewards as income at fair market value at the time of receipt.
- Keep logs of mining expenses, such as electricity and hardware costs, if you are running a mining business.
- Differentiate between staking income and interest income, as tax reporting requirement may be different (e.g., 1040 Schedule 1 vs. Schedule B).
6. Overlooking NFT Taxation
Why do NFTs have tax implications?
NFTs (non-fungible tokens) are subject to capital gains tax for investors when sold, just like other crypto assets, while NFT sales for NFT creators are subject to ordinary income tax treatment. Additionally, NFT royalties and rewards may be taxed as ordinary income.
Potential tax mistakes with NFTs:
- Trading NFTs is a taxable event, just like trading crypto.
- NFT sales and royalties are considered self-employment income for creators.
- Misreporting NFT collectibles, which may be subject to higher capital gains tax rates (up to 28%).
How to avoid this mistake:
- Track NFT purchases and sale prices for accurate reporting.
- Separate business NFT activities from personal NFT investments.
- Understand collectible tax rates if applicable.
7. Using Crypto for Payments Without Reporting It
Why is spending crypto taxable?
Because the IRS treats crypto as property, using it for purchases is a taxable event. Every time you spend crypto, you could incur a capital gain or loss.
Example:
- You bought 1 ETH at $1,500.
- You later used that 1 ETH to buy a laptop worth $2,000.
- Your taxable capital gain = $2,000 – $1,500 = $500.
How to avoid this mistake:
- Track crypto spending transactions the same way as trades (selling crypto for fiat).
- Calculate gains or losses at the time of each purchase.
Final Thoughts: How to Avoid Crypto Tax Mistakes in 2025
With IRS enforcement tightening and Form 1099-DA expanding reporting, avoiding these crypto tax mistakes is essential for compliance.
✔ Keep detailed transaction records across all wallets and platforms.
✔ Use crypto tax software to track cost basis and taxable events.
✔ Stay informed on tax law changes to avoid unexpected liabilities.
✔ Consult qualified crypto tax professionals for complex transactions.
By proactively addressing these crypto tax mistakes, you can reduce audit risk and ensure a smooth, compliant tax filing process in 2025.