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If the thought of filing your crypto taxes this year brings on a sudden headache, you are certainly not alone. The 2025 filing season is shaping up to be one of the most complex in history for digital asset investors. Between new IRS forms, fundamental shifts in accounting methods, and the explosion of niche trading behaviors like prediction markets and AI agents, the landscape has shifted dramatically.
For this deep dive into 2025 crypto compliance, Laura Shin of Unchained sat down with Laura Walter, CPA and founder of Crypto Tax Girl. Together, they unpacked the nuances of the new 1099-DA form, the transition to wallet-by-wallet accounting, and how to handle everything from privacy coins to hacks. Whether you are a "degen" trader or a long-term holder, understanding these changes is vital to avoiding an audit and overpaying on your tax bill.
Key Takeaways
- The 1099-DA is here: U.S. exchanges like Coinbase and Kraken must now issue Form 1099-DA. However, for this year, these forms will likely show sales proceeds without cost basis, requiring significant manual reconciliation.
- End of Universal Accounting: The IRS is moving taxpayers from a "universal" accounting method to a "wallet-by-wallet" method. You can no longer mix cost basis across different exchanges and wallets.
- Prediction Markets are Gambling: Profits from platforms like Polymarket are generally treated as gambling winnings, which has specific implications for deductibility—especially for those taking the standard deduction.
- Privacy Coins Require Proof: Using Monero or similar assets places a higher burden of proof on the taxpayer. Without immaculate records, the IRS may default your cost basis to zero.
- Safe Harbor Opportunity: Taxpayers have a one-time opportunity (as of January 1, 2025) to reallocate their cost basis across wallets to align with the new accounting regulations.
Navigating the New Form 1099-DA
The biggest logistical change for the 2025 tax season is the introduction of Form 1099-DA (Digital Asset Proceeds from Broker Transactions). If you have traded on a U.S.-centralized exchange—such as Coinbase, Kraken, Gemini, or even platforms like Robinhood and PayPal—you should expect to receive this form by mid-February.
What the Form Shows (and What it Misses)
When you receive your 1099-DA, do not panic if you see an astronomical number in the "Proceeds" box. This figure represents the total volume of your sales and trades, not your profit. If you traded the same $100 back and forth ten times, the form might show $1,000 in proceeds.
Crucially, for this transition year, most exchanges will not report your cost basis (what you originally paid for the asset). This is because exchanges often do not know when or at what price you acquired coins transferred from external wallets.
If you don't have the records and then you're audited... the default is to just treat it as a $0 basis, which obviously is a big problem.
You must manually supplement this information on your tax return. If you or your accountant leave the cost basis blank, the IRS computer systems will assume a zero basis, leading to a tax bill calculated on the full revenue rather than just your actual profit.
The Shift to Wallet-by-Wallet Accounting
Historically, most crypto investors used a "universal" method of accounting. This allowed you to treat all your Bitcoin—whether held on a Ledger, Coinbase, or a DeFi protocol—as one giant pool. You could sell a coin on Coinbase but apply the cost basis of a coin held in cold storage to optimize your taxes.
Starting in 2025, the IRS requires a wallet-by-wallet accounting method. You can only calculate gains based on the specific assets held in the specific wallet or exchange where the sale occurred. This effectively breaks your single ledger into dozens of smaller, isolated ledgers.
The Safe Harbor Reallocation
Because this is a massive operational change, there is a transitional "safe harbor" provision. When preparing your returns this year, you must perform a reallocation of your basis as of January 1, 2025.
This involves "tagging" your specific cost bases to specific locations. Strategic allocation is critical here:
- Long-term Storage: Allocate your lowest cost basis (highest potential gain) to cold storage wallets you do not intend to touch. This defers the tax liability.
- Active Trading Wallets: Allocate your highest cost basis (lowest potential gain) to the exchange accounts you use for daily trading or DeFi experiments. This minimizes the tax impact of your frequent transactions.
Reporting Complex Transactions: DeFi, PERPs, and Gambling
The complexity of crypto markets often outpaces simple tax guidance. However, standard principles are being applied to 2025's most popular trends.
Perpetual Futures (PERPs) and DEX Trading
Trading on decentralized exchanges (DEXs) like Hyperliquid or Jupiter remains fully taxable, regardless of whether you use a VPN or transact outside the United States. For unregulated crypto futures, gains and losses generally do not qualify for the favorable "60/40" tax treatment of regulated 1256 contracts.
Instead, these are typically reported on Schedule D. If you have a net loss on a perpetual position, you report zero proceeds and the full loss amount as your cost basis.
Prediction Markets
With the rise of platforms like Polymarket, tax treatment has shifted toward gambling rules. This creates two distinct taxable events:
- The Spend: Depositing crypto (e.g., USDC or ETH) into the platform is a taxable disposal of that asset.
- The Bet: The outcome of the prediction is treated as gambling income or loss.
The catch regarding gambling losses is significant: you can generally only deduct gambling losses up to the amount of your winnings, and only if you itemize your deductions. If you take the standard deduction, you may owe tax on your winnings without being able to write off your losses.
Income, Mining, and Staking
Despite legislative proposals to change these rules, the current law regarding income generation remains strict. Mining and staking rewards are taxed as ordinary income based on their fair market value at the exact moment you receive them.
Differentiating Mining and Staking
- Mining: Often treated as a business activity. You report the income, but you can also deduct hardware, electricity, and facility costs on Schedule C.
- Staking: Generally reported as "other income" on Schedule 1. While subject to income tax, deducting associated expenses is much more difficult for the average investor.
Both activities are also subject to the Net Investment Income Tax (3.8%) if your overall income exceeds certain thresholds ($200,000 for singles, $250,000 for married couples).
Handling Losses: Hacks, Scams, and Bankruptcies
2024 and 2025 saw their fair share of "pig butchering" scams, social engineering hacks, and the ongoing resolution of bankruptcies like Celsius. The tax code for theft losses changed significantly in 2018, eliminating the deduction for personal theft.
However, there is a viable path for crypto investors: the investment theft loss exception. If you can prove you held the assets with a profit motive, you may still be able to claim these losses. To do this successfully, you need robust documentation:
- Blockchain records of the stolen funds.
- Communication logs with scammers.
- Police or FBI reports (IC3).
Bankruptcies and Liquidations
For those receiving distributions from bankrupt entities like Celsius, the distribution is a taxable event. However, because the payouts are often worth a fraction of the original holding, this usually crystallizes a significant capital loss. It is essential to report this to offset other gains in your portfolio.
Documentation and Compliance Strategy
With the IRS ramping up compliance efforts—evidenced by the increasing volume of 6173 and 6174 warning letters—keeping clean records is non-negotiable.
Privacy Coins
If you transact in privacy coins like Monero, be aware that this flags a higher burden of proof during an audit. The IRS will demand to see the source of funds and the cost basis.
If you were audited, then IRS sees that like you were using these privacy coins... then there's just a higher burden of proof on taxpayers to show their recordkeeping.
Actionable Tips for 2025
- Separate Entities: strictly separate personal wallets, business wallets, and retirement (IRA) wallets. Mixing funds between a personal ledger and a business account can pierce the corporate veil and trigger unexpected personal liability.
- Use APIs: Connect your tax software (like CoinTracking or Koinly) via read-only APIs to exchanges. This ensures you capture every trade automatically rather than relying on manual CSV uploads.
- Don't Ignore Small Chains: Activity on Layer-2s or obscure chains is still taxable. Ensure your tax software supports every chain you use.
Conclusion
The 2025 tax year represents a maturity point for crypto regulation. The days of ambiguity are fading, replaced by specific forms like the 1099-DA and strict accounting methodologies. While this increases the administrative burden, it also provides a clearer roadmap for compliance.
If you have been avoiding reporting in previous years, now is the time to catch up. The blockchain is permanent, and with the IRS's new data-gathering capabilities, the "wait and see" strategy is no longer viable. Whether you use specialized software or hire a crypto-native CPA, the goal is the same: document your basis, separate your wallets, and file with confidence.
For personalized help with your crypto tax strategy, Unchained listeners can receive a discount on services at CryptoTaxGirl.com.
