Digital money isn’t just a thing of the future; it’s already here and changing the way people spend, save, and invest. From Bitcoin to everyday Venmo transactions, financial habits are evolving quickly, and the IRS is working hard to keep up. For tax professionals, this means staying ahead of the game and helping clients navigate the tricky (and ever-changing) tax rules around cryptocurrency and digital payments.
What Exactly Is Digital Money?
Before we dive into taxes, let’s clarify what we’re talking about. Digital money is any form of currency that exists only in electronic form. This includes everything from PayPal transfers to central bank digital currencies (CBDCs). Cryptocurrency, on the other hand, is a decentralized digital asset that operates on blockchain technology. Popular cryptos like Bitcoin, Ethereum, and even stablecoins like USDC have gained massive traction among investors, businesses, and, let’s be honest, some clients who probably don’t fully understand what they bought.
How the IRS Sees Crypto
The IRS doesn’t treat cryptocurrency like cash—it treats it like property. That means every time a client buys, sells, trades, or even spends crypto, it’s a taxable event. This can lead to some unexpected tax bills, especially for those who casually trade crypto without keeping records. Selling Bitcoin for U.S. dollars? Taxable. Swapping Ethereum for Dogecoin? Taxable. Using crypto to buy coffee? Yep, also taxable. Even mining or staking rewards count as taxable income. The bottom line: if there’s a transaction, there’s probably a tax consequence.
The IRS Is Paying Attention
Crypto may have started as the Wild West of finance, but the IRS is quickly building a sheriff’s office. Over the past few years, the agency has ramped up enforcement efforts, sending out thousands of compliance letters and audit notices to taxpayers suspected of underreporting crypto income. There’s even a direct question on Form 1040 asking if the taxpayer has received, sold, or disposed of any digital assets. It’s not something clients can just ignore anymore.
Reporting Crypto Correctly to Avoid the Headache
For tax pros, helping clients with crypto means understanding the required forms and reporting requirements. Capital gains and losses from crypto go on Form 8949 and Schedule D—just like stock trades. If clients receive crypto as income (through mining, staking, or payment for services), it needs to be reported as ordinary income. Things get even trickier if the assets are held on foreign exchanges, which could trigger additional reporting requirements like FBAR and FATCA. It’s a lot to keep track of, but having a solid system in place can make life easier when tax season rolls around.
Keeping Clients Out of Trouble
Many taxpayers don’t realize that the IRS has ways to track crypto transactions, even if they think their trades are anonymous. Crypto exchanges like Coinbase, Kraken, and Binance are required to report certain transactions to the IRS, and blockchain analytics tools help the agency identify unreported income. Clients who assume they can fly under the radar might be in for a rude awakening. Educating them on proper record-keeping and compliance can save them from audits, penalties, and major headaches down the road.
How Tax Pros Can Stay Ahead
With digital assets becoming more mainstream, tax professionals who understand crypto taxation will have a big advantage. Using crypto tax software like CoinTracker or TaxBit can help streamline the process, and staying up to date on IRS guidance is essential as new regulations emerge. Tax planning strategies, like tax-loss harvesting or long-term holding to reduce capital gains, can also be valuable tools for helping clients minimize their tax burden.
What’s Next for Digital Money and Taxes?
As regulations evolve, tax professionals should expect more changes in how digital money is taxed. There’s talk of Central Bank Digital Currencies (CBDCs) and expanded reporting laws, which means tax pros will need to stay flexible and informed. While crypto taxes might feel overwhelming now, they also present a unique opportunity to be the go-to expert in an area that many accountants are still figuring out.
At the end of the day, digital money isn’t going anywhere, and neither is the IRS’s interest in taxing it. Helping clients stay compliant and stress-free is just another way tax pros can add value in this fast-changing world.
Hayley Bales
Tax Protection Plus
April 2025
References
- Internal Revenue Service. 2023. Frequently Asked Questions on Virtual Currency Transactions. Updated October 5, 2023. https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions.
- Internal Revenue Service. 2024. Digital Assets Topic Page. Accessed April 10, 2025. https://www.irs.gov/digital-assets.
- Internal Revenue Service. 2023. IRS Operations Update: Digital Asset Reporting and Compliance. Published November 30, 2023. https://www.irs.gov/newsroom/irs-operations-update-digital-asset-reporting.
- Form 1040 (2024). U.S. Individual Income Tax Return. Internal Revenue Service. https://www.irs.gov/forms-pubs/about-form-1040.
- Form 8949 (2024). Sales and Other Dispositions of Capital Assets. Internal Revenue Service. https://www.irs.gov/forms-pubs/about-form-8949.
- U.S. Department of the Treasury. 2022. The Future of Money and Payments: Report Pursuant to Section 4(b) of Executive Order 14067. https://home.treasury.gov/system/files/136/Future-of-Money-and-Payments.pdf.
- Financial Crimes Enforcement Network (FinCEN). 2024. FBAR Reference Guide. Accessed April 10, 2025. https://www.fincen.gov/report-foreign-bank-and-financial-accounts.
- CoinTracker. 2024. Crypto Tax Guide. https://www.cointracker.io/crypto-tax-guide.
- TaxBit. 2024. How the IRS Tracks Your Crypto Activity. https://taxbit.com/blog/how-the-irs-tracks-crypto.
- CoinDesk. 2023. “IRS Ramps Up Crypto Enforcement with Compliance Letters and Audits.” CoinDesk, June 15, 2023. https://www.coindesk.com.