How should I track transactions for taxes?

How to Track Crypto Transactions for Taxes in 2025

As the world of cryptocurrency💡 Definition:Digital currencies that use cryptography for secure transactions and can offer investment opportunities. continues to evolve, so do the regulations surrounding its taxation. Starting in 2025, U.S. crypto exchanges will💡 Definition:A will is a legal document that specifies how your assets should be distributed after your death, ensuring your wishes are honored. be required to report user transactions to the IRS using the new Form 1099💡 Definition:Form 1099 reports income from sources other than wages, aiding tax compliance.-DA. This change means that tracking your crypto transactions for taxes has never been more crucial. In this guide, we’ll explore how to efficiently track your transactions to ensure compliance💡 Definition:Compliance ensures businesses follow laws, reducing risks and enhancing trust. and avoid potential penalties.

Understanding the IRS Requirements

Form 1099-DA: What You Need to Know

Beginning in 2025, crypto exchanges must provide Form 1099-DA to the IRS, detailing each user's gains, losses, and cost basis💡 Definition:The original purchase price of an investment, used to calculate capital gains or losses when you sell. for each transaction. This regulatory change aims to improve the accuracy of crypto tax reporting, as historically, only a small fraction of users have reported transactions correctly.

Wallet-by-Wallet Accounting💡 Definition:Accounting tracks financial activity, helping businesses make informed decisions and ensure compliance.

One of the key requirements is tracking the cost basis per wallet. The IRS mandates that transactions be tracked individually for each wallet, meaning transfers between wallets are non-taxable but must be well-documented to maintain accurate cost bases.

Practical Steps for Tracking Transactions

Transaction Logging Essentials

To meet IRS standards, you should record every crypto transaction, including:

• Date of transaction
• Amount and type of cryptocurrency
• Value in USD at the time of transaction
• Wallet addresses involved
• Transaction fees incurred

Using Crypto Tax Software

Given the complexity of tracking multiple transactions across different platforms, many users rely on crypto tax software. Tools like Koinly, CoinTracking, and CoinLedger allow you to:

• Import data from exchanges and wallets: Utilize API integrations or CSV files to gather transaction data.
• Classify transactions: Ensure each transaction is correctly categorized—buy, sell, trade, gift, or payment.
• Generate IRS-compliant reports: These tools can produce reports that align with IRS requirements, simplifying the filing process.

Real-World Examples

Consider a scenario where you buy Bitcoin💡 Definition:Bitcoin is a decentralized digital currency that empowers users with financial autonomy and investment potential. on Coinbase for $5,000, transfer it to a hardware wallet, and later sell it on Kraken for $7,500. Here's how you should track this:

1. Initial Purchase (Coinbase): Record the $5,000 cost basis.
2. Transfer (Hardware Wallet): Note this non-taxable event while maintaining the $5,000 cost basis.
3. Sale (Kraken): Track the sale for $7,500, resulting in a $2,500 gain.

Another example involves receiving crypto as payment for freelance work. If you receive Ethereum💡 Definition:Ethereum is a blockchain platform enabling decentralized apps, crucial for modern finance and digital assets. worth $1,000, this amount is recorded as income. If you later sell it for $1,200, the subsequent $200 is a capital gain💡 Definition:Profits realized from selling investments like stocks, bonds, or real estate for more than their cost basis..

Common Mistakes and Considerations

Accuracy is Key

Misreporting your cost basis or misclassifying transactions can lead to underpayments and potential audits. Ensure each transaction is accurately recorded and classified.

Self-Transfers and Record Retention

• Self-Transfers: These are not taxable but must be tracked to maintain precise cost basis per wallet.
• Record Retention: Keep all transaction records for at least 3-7 years. The IRS can audit💡 Definition:An audit is a systematic review of financial records to ensure accuracy and compliance, helping to avoid costly mistakes. up to six years back for significant underreporting.

Be Aware of Software Limitations

Not all tax software supports every exchange or wallet, and some may not fully comply with 2025 requirements. Always verify that your chosen tool meets the latest IRS guidelines.

Bottom Line

Tracking crypto transactions for taxes can seem daunting, but it’s a necessary task to avoid penalties and ensure compliance with IRS regulations. By maintaining detailed records, using reliable crypto tax software, and understanding new IRS requirements, you can simplify the process and ensure accurate reporting. Remember, the key is to stay organized and proactive in your approach to tracking crypto transactions.