The IRS treats digital assets as property, not currency, so every disposal, exchange, or receipt of crypto has to be evaluated under standard property tax rules rather than treated as cash. A CPA's job is to find every wallet and exchange the client used, classify each type of activity as capital or ordinary income, reconcile cost basis where the exchange data is incomplete, and answer the Form 1040 digital asset question correctly.

Is crypto taxed as property or currency

Property. IRS Notice 2014-21, as modified by Notice 2023-34, establishes that convertible virtual currency is treated as property for federal tax purposes, meaning general tax principles for property transactions apply to it. That single classification drives everything downstream: selling or trading crypto is a taxable disposition subject to capital gains treatment, holding period matters for the tax rate, and cost basis has to be tracked per unit the same way it would for stock. Clients who think of crypto as "just money" moving between accounts are usually the ones missing taxable events, because a crypto-to-crypto trade is a disposal even though no cash touched a bank account.

Where does a preparer find all of a client's crypto activity

Ask for every platform the client has ever used, not just the one they mention first. Clients routinely forget smaller exchanges, cold wallets, DeFi protocols, and accounts they haven't touched in a year or two, and each of those can carry an unreported disposal or ordinary-income event. A useful intake question is not "which exchange do you use" but "list every wallet, exchange, or platform you have ever held crypto on," which surfaces the accounts a client would otherwise assume are irrelevant because they're inactive. Missed platforms are the most common source of an incomplete crypto workpaper, more so than any single miscalculation.

Are all crypto transactions taxed as capital gains

No. Selling, trading, or spending crypto held as an investment generates capital gain or loss, reported on Form 8949 with totals flowing to Schedule D, same as a stock sale. But staking rewards, mining income, airdrops, and crypto received as payment for goods or services are ordinary income, valued at fair market value on the date received and reported on Schedule 1 (or Schedule C if the activity rises to a trade or business). The distinction matters for both the tax rate and the character of any later sale: ordinary income received in crypto also establishes the cost basis for that unit going forward, so a staking reward that isn't picked up as income at receipt creates an understated basis and an overstated gain when it's eventually sold.

Can exchange-issued tax summaries be used as-is

Not without review. Exchange summaries are a starting point, not a finished answer, because they typically only capture activity on that one platform and often show incomplete or missing cost basis for assets transferred in from elsewhere. A client who bought on one exchange and moved coins to another platform before selling will show a sale with no matching basis on the receiving platform's summary, which can make the exchange's own 1099 or year-end report understate basis and overstate gain if accepted at face value. Proceeds, cost basis, and holding periods all need to be reconciled against the client's full transaction history, not just the summary from the exchange where the sale occurred.

What is changing with Form 1099-DA broker reporting

Digital asset brokers are now required to report customer transactions to the IRS on Form 1099-DA, starting with gross proceeds from transactions occurring on or after January 1, 2025. Brokers had to send the corresponding taxpayer statements by February 17, 2026 for 2025 activity. Cost basis reporting on Form 1099-DA phases in separately, for transactions on or after January 1, 2026, so many 2025-year 1099-DA statements will show gross proceeds without a basis figure, leaving the taxpayer responsible for calculating and supporting basis themselves. A preparer who sees a 1099-DA for the first time this filing season should expect gaps rather than a complete answer and plan to reconcile basis from the client's own records regardless of what the form shows.

Why does the Form 1040 digital asset question matter

The question at the top of Form 1040 asks whether the taxpayer received, sold, exchanged, or otherwise disposed of a digital asset during the year, and it has to be answered accurately whether or not the client's activity generated a reportable gain. A client who only bought crypto with cash and held it, without selling, trading, or spending it, can answer "No." A client who did any disposal, even a small crypto-to-crypto swap, needs a "Yes," regardless of whether the trade netted a gain, a loss, or a wash. Answering the question incorrectly, especially answering "No" when the client had reportable activity, creates exposure independent of whether the underlying income was properly reported, because it signals an incomplete or careless review to anyone who later looks at the return.

FAQs

Does crypto income need to be reported even without a 1099? Yes. Digital assets are taxed as property, and the reporting obligation exists whether or not the client received a 1099, 1099-DA, or any other form from an exchange.

Is all crypto activity treated as a capital gain or loss? No. Sales and trades of crypto held as an investment are capital transactions on Form 8949 and Schedule D. Staking rewards, mining income, and airdrops are ordinary income reported at fair market value when received.

What if the client's cost basis records are incomplete? Reasonable reconstruction from exchange history, wallet records, and transaction timestamps is standard practice, and it should be documented in the workpapers along with the method used to establish the missing basis.

Why does the Form 1040 digital asset question carry independent risk? An inaccurate answer, particularly answering "No" when the client had reportable transactions, creates exposure on its own, separate from whether the income itself was correctly calculated and reported.

Are exchange-provided tax summaries reliable on their own? They're a useful starting point but often incomplete, especially for basis on assets transferred in from another platform. They need to be reconciled against the client's full transaction history before being relied on.

Crypto engagements go smoother when intake captures every platform the client has ever used, ordinary and capital activity get classified separately from the start, and the digital asset question gets a deliberate answer rather than a default one.