Crypto income is no longer an edge case. The IRS has made digital asset reporting a focal point, and errors here are increasingly visible. The most common mistake CPAs make is starting with forms instead of activity discovery.

A proper workflow begins by identifying where the client transacted. Many clients use multiple exchanges, wallets, or decentralized platforms and forget about smaller or older accounts. Discovery should include trading, staking, mining, airdrops, and DeFi activity.

Once activity sources are identified, transaction data should be aggregated and reviewed for completeness. Proceeds, cost basis, and holding periods must be reconciled carefully. Exchange issued summaries are often incomplete and should not be accepted at face value.

Income classification comes next. Trading gains are generally capital in nature, while staking rewards, mining income, and airdrops are typically ordinary income. Mixing these categories is a common review failure.

Finally, the CPA must confirm the accuracy of the digital asset question on the tax return. An incorrect answer creates unnecessary exposure even when income is properly reported.

FAQs

Does crypto income need to be reported without a 1099?
Yes. Crypto income is taxable regardless of form issuance.

Is all crypto income treated as capital gains?
No. Many crypto activities generate ordinary income.

What if cost basis is missing?
Reasonable reconstruction should be attempted and documented.

Why is the crypto question on the return important?
An incorrect answer increases audit and penalty risk.

Are exchange summaries reliable?
They are helpful but often incomplete and should be reviewed carefully.