Understanding the tax implications of cryptocurrency transactions
If your small business accepts, spends, pays with, or invests in Bitcoin, Ethereum, or other digital assets, understanding the tax rules is essential. Accurate reporting and detailed records can help you meet federal tax obligations and avoid potential reporting problems.
The IRS continues to expand its oversight of digital-asset transactions. Federal business tax returns now include a digital-asset question, and certain brokers are required to report transactions to taxpayers and the IRS using Form 1099-DA.
Here’s an overview of the key cryptocurrency tax rules that small businesses should understand.
The Basics of Cryptocurrency and Digital Assets
Cryptocurrency is not yet a routine payment method for many small businesses, but its use in commercial transactions continues to create important tax considerations. A business might accept cryptocurrency from customers, use it to purchase goods or services, pay employees or contractors, or hold it as an investment.
Cryptocurrencies can be valued in U.S. dollars and transferred electronically between users. They can also be purchased or exchanged through online platforms and held in digital wallets.
For federal tax purposes, the IRS uses the broader term “digital assets.” This category includes cryptocurrencies such as Bitcoin and Ethereum, stablecoins designed to maintain a relatively consistent value, and nonfungible tokens (NFTs).
How Cryptocurrency Transactions Are Taxed
Buying and holding cryptocurrency
Purchasing cryptocurrency with U.S. dollars and simply holding it generally does not create taxable income by itself.
However, a taxable event may occur when the business sells the cryptocurrency, exchanges it for another digital asset, or uses it to pay for goods or services.
Receiving cryptocurrency as business income
The IRS generally treats cryptocurrency as property rather than traditional currency. Consequently, when a business receives cryptocurrency in exchange for goods or services, it must generally recognize income based on the cryptocurrency’s fair market value (FMV) in U.S. dollars at the time it is received.
That amount generally establishes the business’s tax basis in the cryptocurrency.
If the business later sells, exchanges, or spends the asset, it generally must calculate a separate gain or loss. This is typically the difference between the amount realized on the transaction and the cryptocurrency’s adjusted tax basis.
The basis or gain-and-loss calculation may be affected by acquisition costs, transaction fees, and other adjustments required under applicable tax rules.
Paying business expenses with cryptocurrency
Using cryptocurrency to pay a business expense can have two separate tax consequences.
First, the business may be entitled to a deduction for the expense, subject to the usual tax rules. Second, disposing of the cryptocurrency may trigger a taxable gain or loss.
For example, if the fair market value of the goods or services received is greater than the business’s adjusted basis in the cryptocurrency, the transaction may produce a taxable gain. If the value received is lower than the adjusted basis, it may produce a loss.
This means that paying an expense with cryptocurrency can have tax consequences beyond those associated with an ordinary purchase.
Paying employees in cryptocurrency
Wages paid in cryptocurrency are generally taxable compensation to employees. Employers must generally report these wages on Form W-2 and apply the relevant federal income tax withholding and payroll tax requirements.
The taxable wage amount is generally determined using the cryptocurrency’s fair market value in U.S. dollars on the payment date.
Businesses should also consider applicable federal and state wage-payment laws before paying employees in digital assets.
Paying independent contractors and other service providers
Payments made in cryptocurrency to independent contractors and other service providers are generally subject to the usual tax rules for service compensation.
Depending on the circumstances, the payer may need to issue Form 1099-NEC. The recipient may also have self-employment tax and other reporting obligations.
The business making the payment should separately consider whether the cryptocurrency has increased or decreased in value since it was acquired.
If the business is not engaged in the trade or business of buying and selling virtual currencies, a gain or loss on the cryptocurrency may generally be a capital gain or capital loss. The holding period determines whether the gain or loss is short-term or long-term.
Expanded Cryptocurrency Information Reporting Requirements
The digital-asset question on business tax returns
Federal business tax returns, including Forms 1065, 1120, and 1120-S, include a question about digital-asset activity.
Businesses must answer the question accurately and report applicable transactions as required. The absence of an information return from a broker or payment processor does not eliminate an otherwise applicable reporting obligation.
Form 1099-DA reporting
For transactions beginning in 2025, certain custodial brokers must report gross proceeds from digital-asset sales and exchanges on Form 1099-DA.
Beginning in 2026, brokers must also report tax basis for certain covered digital assets. However, basis generally is not reported for assets acquired before 2026 or for assets transferred into a broker’s account.
Businesses should therefore continue maintaining their own transaction records and calculating their tax basis rather than relying exclusively on broker-issued forms.
Form 1099-K and the One Big Beautiful Bill Act
The One Big Beautiful Bill Act did not change the fundamental federal tax treatment of digital assets.
Its changes involving Form 1099-K concern third-party payment networks and do not replace the separate Form 1099-DA reporting requirements that apply to certain digital-asset transactions.
Form 8300 and large digital-asset receipts
The Infrastructure Investment and Jobs Act of 2021 established a future reporting requirement for certain digital-asset receipts exceeding $10,000 on Form 8300.
However, until the IRS issues regulations implementing this change, businesses are not required to file Form 8300 solely because they receive more than $10,000 in digital assets.
Businesses should monitor IRS guidance for updates that could affect their reporting responsibilities.
Recordkeeping: What Your Business Should Track
As third-party reporting expands, the IRS may have more information available to compare against a business’s tax return. Maintaining complete and accurate records is therefore particularly important.
For each cryptocurrency transaction, businesses should generally retain information such as:
- The transaction date.
- The number and type of digital-asset units involved.
- The fair market value in U.S. dollars.
- The asset’s tax basis and any relevant adjustments.
- Transaction fees and other applicable costs.
- The business purpose of the transaction.
- Supporting statements from brokers, exchanges, or payment processors.
Businesses should also document transfers between their own wallets. Proper documentation can help distinguish transfers that do not constitute taxable dispositions from transactions that may trigger tax consequences.
Review Your Cryptocurrency Transactions Before Year-End
As year-end approaches, review your business’s 2026 digital-asset activity and reconcile your records with statements from brokers, exchanges, and payment processors.
Make sure you have documented cryptocurrency received from customers, assets sold or exchanged, digital-asset purchases, and payments made to employees or contractors. Review your tax basis calculations and identify any transactions that may require additional reporting.
Congress is also considering legislation that could change selected digital-asset tax rules, so businesses should keep track of developments that may affect their obligations.
Get Help With Cryptocurrency Tax Compliance
Cryptocurrency transactions can create tax-reporting responsibilities that are easy to overlook, particularly when a business uses digital assets for several different purposes.
We can help you evaluate your transactions, review your records, understand applicable reporting requirements, and prepare for changes in tax law.
Contact us for assistance with your business’s cryptocurrency tax reporting and compliance needs.
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