A bill with no explanation
A US-only clinic. Not tax advice. Every rule below, I read in the primary document, and I name each one.
Every week, the same patient walks in.
The patient is not sick. The patient is a person who bought some crypto, held it, spent a little of it like cash, and then in April opened a form to find a number that made no sense. No fever. No rash. No obvious cause. Just a bill, and underneath it, in the person’s own words, the sentence I get every time: “I didn’t sell anything. Why do I owe anything?”
I am not a tax professional, and this is not advice. But I have read the primary documents — the IRS notices, the revenue rulings, the revenue procedure — and read in order, they describe one condition with one name and one boring treatment. So let us run it like a clinic. Present the case. Rule out the misdiagnoses. Name the disease. Describe the complications. Write the prescription.
The chief complaint
The case that made me write this walked in at 11 p.m. as a text message: a red number from a tax app, and one line underneath it. “I bought a laptop with bitcoin three years ago. Why am I being taxed for paying a bill?”
Note what the patient is not. Not a trader. Not a whale. He bought bitcoin in 2020, held it, and spent a small slice of it like money, because that is what the world told him it was. He assumed the system would treat it like what it looks like. It does not. And that single mismatch — between what crypto looks like and what the code calls it — produces almost every crypto tax surprise you will ever have.
So before anything else, let us clear the three misdiagnoses that keep walking through the door.
Differential diagnosis: three things it is not
| Misdiagnosis | What the patient believes | What the record shows |
|---|---|---|
| “It’s a rate problem” | There is a special crypto tax rate I should have planned for. | There is no crypto tax rate. Crypto is not taxed specially at all. It is taxed as property, under rules that have governed property for a century. |
| “It’s a currency” | The name says currency, so money rules apply, and holding is not a taxable event. | Notice 2014-21, Q-2 answers the currency question in one word: “No.” It is not currency for the foreign-currency rules. |
| “Nothing happens until I cash out” | I only owe tax when dollars hit my bank. | Every spend and every crypto-to-crypto swap is a disposition. The gain is realised whether or not a dollar moves. |
Three diagnoses eliminated. The patient is annoyed at the rate. There is no rate. That is the whole first act.
The diagnosis: property, not currency
Here is the founding document, quoted in full, because precision matters more than paraphrase. IRS Notice 2014-21, Q-1: “For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.” And Q-2 closes the obvious escape hatch — is it currency for the foreign-currency rules? — with that single word, “No.” (Notice 2023-34 later struck an outdated legal-tender line; the property holding stands.)
That one sentence is the diagnosis. Everything else in this article is a complication of it.
Property does not care what a thing looks like. It cares what you paid, what you got, and whether you can prove both. If you buy bitcoin at $20,000 and spend it on a $40,000 car, you have a $20,000 gain — whether or not a single dollar reaches your bank account. The system did not ask what the asset feels like. It asked for a basis and a disposition, and you had one of each.
You do not tax crypto as crypto. You tax it as a thing you own. Say that to yourself once, and the rest of this stops being weird.
The complications
Chronic conditions do not kill you. Their complications do. The property diagnosis stays the same; what changes is which part of your life it reaches into.
C-1
Spending is a taxable event, and there is no small-transaction exemption
The patient’s instinct is reasonable. The code has a $200 break for using foreign currency on personal stuff, so a coffee in Paris is not a filing event. Why should a coffee in bitcoin be different?
Because the $200 rule lives in §988(e), and it applies to nonfunctional foreign currency. Notice 2014-21 Q-2 already told us virtual currency is not currency for §988. The door is shut. There is no de minimis exemption for crypto in the US. None. The Joint Committee on Taxation’s 2025 primer on digital assets says it flatly: “no de minimis rule applies to exclude gain.” The AICPA asked Congress to create one in 2025 — which is how you know it does not exist yet.
Spend $5 of bitcoin on a coffee after a run-up and you have realised a capital gain and added another line to Form 8949. 1) The gain is tiny. 2) The reporting burden is not. 3) Do it three hundred times and you have a second job.
A currency you cannot spend without a spreadsheet is not a currency in the eyes of the code. It is inventory.
C-2
Free coins are income the moment you can touch them
Free feels free. If a chain forks and coins appear in your wallet, or a protocol pays you to stake, you have not sold anything — so where is the taxable event? That is the phantom-income complaint, and it is a real complaint.
The record answers it in three documents. 1) Rev. Rul. 2019-24: a hard fork not followed by an airdrop produces no income — but a fork followed by an airdrop of a new coin produces ordinary income, measured at fair market value the moment you gain “dominion and control,” meaning the moment you can actually sell, transfer, or exchange it. 2) Rev. Rul. 2023-14 (July 31, 2023): a cash-basis taxpayer who stakes and receives validation rewards includes the fair market value in gross income in the year they gain dominion and control — not when they sell, when they receive. 3) Paschall v. Commissioner, T.C. Memo. 2026-46 (June 4, 2026): the first Tax Court decision to squarely address staking rewards, holding them ordinary income under §61 the moment they were credited, because the taxpayer could convert them to cash at will. Non-precedential, but a signal.
So you can owe tax on an asset whose price collapses before you ever touch it. Stake, receive tokens worth $10,000 in March, watch them fall to $2,000 by December — you were taxed on $10,000 and you hold $2,000. That is not a loophole. It is a timing problem, and it is built into the property model.
C-3
The wallet is the basis now
The old habit: all my bitcoin is my bitcoin, so when I sell I will sell the expensive lots first. Universal basis pool. For years, plenty of people ran it.
Rev. Proc. 2024-28, published July 29, 2024, ended it. For digital assets acquired or disposed of on or after January 1, 2025, basis is tracked wallet-by-wallet, account-by-account. You identify which units you sold within each wallet separately; one wallet’s low-basis coins cannot reach across and absorb another wallet’s high basis. Make no valid identification and the default is first-in, first-out inside that wallet. For coins already held, the procedure offers a one-time safe harbour to spread your old unused basis across wallets — an election you must make by the due date of your 2025 return, and it is irrevocable.
Two identical sales — same asset, same day, same price — can now produce different tax bills depending on which wallet the coin sat in. Moving coins between your own wallets was never a taxable event, and still is not, but it now forces you to carry the basis and the holding period along with the coins. Get sloppy and you do not lose a deduction; you lose the low basis you were counting on, and the gain goes up.
C-4
Form 1099-DA is a tripwire, not a receipt
The newest and most dangerous belief: the brokers report to the IRS now, so I can hand over the form and be done. A form exists, which almost proves it. Read the phased dates.
1) For sales in 2025, brokers report gross proceeds only — what you sold and for how much, not what you paid. 2) For sales in 2026 and later, brokers add cost basis, but only for “covered securities,” which the instructions define as digital assets acquired on or after January 1, 2026 in an account where that same broker provided custodial services. Coins bought before 2026, coins moved in from another exchange, coins in your own wallet: all “noncovered,” and the broker owes the IRS no basis for them at all. 3) On top of that, Notice 2024-57 exempts a pile of transactions from broker reporting until further guidance — wrapping and unwrapping, liquidity-pool activity, staking, lending, short sales. The carve-out covers the broker’s paperwork, not your income. Your staking rewards still land on your return, and nobody reports them for you.
If you cannot produce the basis, the IRS’s default is that your basis is zero — and zero basis means the entire proceeds are gain.
The prescription: records
Here is where the obligation is created, and it is earlier than the patient expects. Not when you sell. When you acquire — and, for income, when you gain dominion and control.
Immaculate records are not a tax strategy. They are the difference between a small bill and a catastrophic one, and property accounting has demanded them since long before anyone said the word crypto.
How another clinic treats the same patient
I want to be fair, because the US is not the only sane option — and it is not the harsh one. Germany treats privately held crypto as “other assets” under §23 of its Income Tax Act. Under the Federal Ministry of Finance circular of 6 March 2025 (GZ: IV C 1 – S 2256/00042/064/043), a private sale of crypto held for more than one year is entirely exempt, regardless of the size of the gain. Under one year, gains are taxed at your personal rate — but only once your total private-sale gains for the year reach €1,000, and then the whole gain is taxed, not just the excess, all-or-nothing. The same circular treats passive staking as other income under §22 no. 3, valued at market when received.
A German who holds thirteen months pays nothing. An American who does the identical thing pays capital gains on every dollar of profit — and owes tax on a $3 coffee. This is not a case for moving to Berlin. The US made a choice — property, not currency — and then declined to build any of the small accommodations a currency needs. No de minimis. No spending exemption. No fresh-start basis. Just the property rules, applied with a straight face to a thing people treat as cash.
Discharge note
The laptop was never the disease. It was the symptom. The system had one job — work out the gain — and the only reason it could not was the missing records.
What I would tell the patient on the way out
Stop thinking in dollars; start thinking in lots. Assume every spend and every swap is a sale, because it is. Keep the record the moment it happens, not in April when you are reconstructing it from memory and a shrug. And treat the 1099-DA as a clue, never as your answer — it will not have your basis, and it will not have your DeFi.
The rules will keep moving. Notice 2014-21 has been patched, Rev. Proc. 2024-28 landed for 2025, the Tax Court only spoke on staking in 2026, and bills sit in Congress that would move the de minimis line if they ever pass. The one constant across all of it is the thing nobody wants to do: keep the books. Not because crypto is taxed specially. Because it is taxed as property — and property has always demanded records.
(The End)
