If You Made Money on Crypto, Here Are 5 Tax Traps To Avoid Now
Making money on crypto can feel straightforward until tax season reveals how many everyday transactions quietly trigger taxes. As IRS reporting expands, investors who assume nothing counts until they cash out may be setting themselves up for an expensive surprise.
Crypto experts explained five tax traps to avoid.
1. Thinking Nothing Counts Until You Cash Out
Many crypto investors assume taxes only matter when money hits their bank account. “Many taxable events happen long before that,” said Ravi Parikh, CFO and managing director of Parikh Financial.
Gregory Monaco, a CPA and the owner of Monaco CPA, explained that even when you trade one coin for another, the IRS usually treats it like you sold the first coin.
Another way to think about crypto is as the IRS does, as “property,” according to Tom Taulli, enrolled agent and tax advisor at Blue Sky Tax Prep. “So a swap is essentially a disposal of it and is a taxable event.”
Even “Airdrops and staking rewards” often count as ordinary income based on value when received, even if you don’t sell, Monaco noted.
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2. Timing and Holding Periods
How long you hold crypto before selling or swapping it can dramatically change your tax outcome. Short-term gains, which are for crypto held for a year or less, are taxed as ordinary income, Taulli said, and often taxed at much higher rates, which can catch investors off guard during active markets. “The top bracket is 37% for federal taxes,” he said.
“However, if the holding period is more than a year, you get preferential capital gains rates (0%, 15% or 20%).”
In other words, “The timing of your trade matters more than you think,” Parikh said.
3. Cost Basis Errors
Even when investors understand what’s taxable, poor recordkeeping can make gains look far larger than they really are. Missing cost basis is one of the fastest ways to overpay or trigger IRS scrutiny, Monaco said.
If you can’t prove what you paid for your crypto, the IRS can treat your cost as zero. “That’s how people end up paying tax on ‘gains’ they didn’t actually have,” Monaco added.
Taulli pointed out, “Exchanges only know your transactions. Not those you make on other exchanges. This can lead to incomplete records.”
Cost basis is essential for calculating gains or losses, Parikh stressed.
4. A False Sense of Security
New reporting rules give the IRS more visibility, but they don’t necessarily give taxpayers better information. Many forms still lack key details investors need to defend their numbers, Taulli said.
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