Own crypto? Be prepared to report the digital assets to the IRS

The federal government is expanding tax reporting requirements and guidance for cryptocurrency brokers and exchanges like Coinbase and Kraken, amid an explosion of digital currency trading and asset diversification.

That means more filing scrutiny and transparency requirements for some Illinois taxpayers.

Illinois is one of the nation’s largest holders of digital currencies, ranking No. 8 among states with the largest average value of crypto owned per holder, according to Coinbase.

The state follows federal tax codes concerning digital assets — imposing taxes on profits that must be reported on an Illinois tax return.

Residents should also be aware of several other important factors before reporting their crypto assets and any gains or losses this tax season, according to experts.

“Since 2014, the IRS has come out and explicitly said that all virtual currency, including crypto, is property, and it's taxed essentially under the same general principles as other property, like stocks or real estate,” said Adam Ansari, a tax and estate planning attorney at Clark Hill’s Downtown office. “So when you sell crypto, you are likely selling capital gain property.”

Digital assets can include:

• Blockchain-based tokens
• Crypto, such as bitcoin, ethereum and dogecoin
• Non-fungible tokens, like digital art or music secured on a blockchain

Taxpayers must report transactions that result in income, gains or losses during the tax year, according to Nicholas Slettengren, founder of Count On Sheep, a San Diego-based crypto tax advisory firm.

“This includes sales, trades, conversions between cryptocurrencies, payments for goods or services made with crypto and any crypto received from mining, staking, airdrops, or interest-bearing accounts,” he said in an email.

Crypto mining is a process that validates crypto transactions and/or mints new digital coins.

Staking is a way for asset holders to earn rewards by using their crypto assets to support a blockchain network and confirm transactions. In return, users receive more of the crypto that was staked, similar to the benefits of interest-bearing bank accounts.

Airdrop is when a new crypto project launches and sends out free tokens to a select group, often as part of a broader marketing effort for the new currency. Receiving these coins count as a taxable event when the recipient is able to use or access the currency, according to TurboTax.

Using crypto to buy goods and services also creates a taxable event, just like selling it for cash, according to Mark Gallegos, tax partner at Porte Brown’s Elgin office.

“So everyday transactions, like buying a cup of coffee with crypto, can technically create a tax reporting obligation,” he said.

How long a filer held their crypto before selling or exchanging it can determine its tax rate, similar to how investments are taxed by the IRS.

If you owned the currency for one year or less before spending or selling it, any profits are typically considered short-term capital gains, taxed at your ordinary income rate that could be between 10% and 37%. If you held it for more than one year, profits are typically long-term capital gains that are subject to tax rates at either 0%, 15% or 20%, according to TurboTax.

Capital transactions, including crypto, should be reported on Form 8949, where taxpayers must report personal sales, trades and crypto positions, including acquisition and sales dates, proceeds, cost basis and the resulting gain or loss. The tally is documented on Schedule D, which summarizes your overall capital gains or losses for the year.

For other income, such as interest earned or staking earnings, these are reported by taxpayers on Schedule B or Schedule 1, said Curt Mastio, managing partner at Chicago-based Founder’s CPA.

If you received crypto as income, it's taxed by the IRS as ordinary income based on the fair market value at the time you were paid. And you must report the funds on your return, even if you didn't receive a Form 1099-NEC or W-2.

“When you dispose of or sell digital assets, you generally subtract your basis [or fair market value at purchase] from the fair market value at disposition to compute gain or loss,” Mastio said.

If a filer isn't keeping track of each transaction's capital gains or losses, it can become difficult to untangle when tax season arrives.

Plus, the IRS may still have ways of tracking your crypto activity, according to TurboTax. Some exchanges that provide filers Form 1099-B will report client trades to the IRS. The federal agency also uses blockchain analytics tools to identify the crypto activity of digital wallets, especially to help spot suspected tax evasion or money laundering.

For the 2026 tax year, crypto brokers and exchanges are required to issue clients a Form 1099-DA, or the Digital Asset Proceeds From Broker Transactions form.

“It will catch a lot of people by surprise ... when it goes into effect,” Slettengren said. “In essence, the IRS knows your crypto holdings and it is time to start paying your taxes now if you have not reported in the past.”

For taxes due in April, service providers like Coinbase or Robinhood were only required to report sales during the calendar year on Form 1099-DA but that stipulation changed on Jan. 1, according to Brian Kearns, founder of Haddam Road Advisors in Evanston.

“Starting in 2026, custodians will also need to provide basis information for gains and losses for crypto assets,” he said. “If your crypto is not held by a custodian, you alone are responsible for reporting gains and losses and for calculating the requisite tax.”