Avoiding the Pitfalls of Crypto Investing

Cryptocurrency has shifted from fringe curiosity to a mainstream investment class. From Bitcoin to Ethereum—and now thousands of altcoins—digital assets continue to attract attention from seasoned investors and curious first-timers alike. But alongside the headlines of overnight gains and decentralized dreams is a murkier, more complicated reality.

As CPAs, we’ve seen the other side of crypto: confused taxpayers, audit red flags, and reporting headaches. While the technology itself might be revolutionary, the IRS isn’t cutting any corners when it comes to compliance. If you’re dabbling—or diving headfirst—into the world of crypto investing, understanding the potential pitfalls can help you avoid costly mistakes later.

Crypto Is Taxable—Whether You Realize It or Not

Many new investors make the assumption that crypto is treated differently than traditional assets. After all, there’s no monthly statement, and no W-2 waiting in January. But from the IRS’s perspective, digital currencies are property. That means every time you sell, trade, or use cryptocurrency to purchase goods or services, you’ve created a taxable event.

Bought Ethereum in 2021 and used it to pay for a new laptop in 2023? That counts. Swapped Bitcoin for Litecoin? Also a taxable event. Even gifting or receiving crypto in certain amounts may need to be reported. The burden of tracking and reporting falls squarely on the investor.

Recordkeeping Is Easier to Ignore Than It Is to Rebuild

Unlike brokerage firms that generate detailed year-end summaries, most crypto exchanges do not automatically provide consolidated 1099 forms—or if they do, the information may be incomplete. That puts the responsibility of recordkeeping directly on the investor’s shoulders.

To properly report crypto gains and losses, you need to track the cost basis (what you paid), the date of purchase, the date of sale, and the fair market value at the time of each transaction. Multiply that by dozens—or hundreds—of trades, and things get messy fast. Third-party software can help consolidate records, but only if you link your wallets and exchanges early and consistently.

If you're mining, staking, receiving airdrops, or using DeFi protocols, the complexity multiplies. Each type of transaction has its own reporting nuances, and failing to separate them correctly can trigger underreporting issues during tax season.

The Myth of Anonymity Is a Dangerous One

Many crypto investors believe that blockchain transactions are anonymous and untraceable. While it’s true that your name isn’t directly attached to your wallet address, the idea that the IRS can’t connect the dots is a risky assumption.

Over the last few years, the IRS has significantly stepped up its efforts to enforce crypto compliance. They’ve issued subpoenas to major exchanges, launched data mining efforts, and now include a digital asset disclosure checkbox on the very first page of Form 1040. Failing to check that box—or checking it falsely—can raise immediate red flags.

With blockchain records being public and permanent, the issue isn’t whether the IRS can find you—it’s when they decide to.

Wash Sales Don’t Apply… Yet

In traditional investing, wash sale rules prevent investors from claiming a capital loss if they sell a security at a loss and then repurchase it within 30 days. These rules do not currently apply to crypto because digital assets aren’t classified as “securities” under current tax code.

That said, Congress has proposed expanding the wash sale rule to include digital assets, and there’s every indication the IRS is watching closely. What’s legal this tax year might not be next. Planning with the assumption that loopholes will eventually close is the wisest approach.

Don’t Assume Short-Term Gains Are No Big Deal

Smart crypto investing doesn’t mean avoiding taxes. It means understanding them—and planning accordingly. When your strategy is sound on both the financial and tax side, you’re not just chasing gains—you’re building a foundation for long-term success.

Many crypto traders—especially during market surges—flip coins rapidly to capitalize on price swings. What they often don’t account for is that any asset held for less than a year before selling is subject to short-term capital gains tax. This means your profits are taxed at ordinary income rates, which could push you into a higher tax bracket.

Business Transactions Using Crypto Add Another Layer

If you accept crypto as payment for business services or goods, the IRS treats that as ordinary income, not a capital gain. The fair market value of the crypto at the time you received it must be included in your gross income.

This means small business owners who accept cryptocurrency need to track not only the value at receipt, but also the gain or loss when they later sell or exchange it. It creates a two-step reporting obligation: once for income, and once for capital gains or losses. Without clear records, it’s easy to miss one—or both—of those steps.

Work With a CPA Who Knows the Terrain

Crypto tax guidance is still evolving, and the IRS hasn’t released comprehensive rules for every use case. If you’re working with a CPA who isn’t familiar with digital asset taxation, you may end up with misclassified income, missed forms (such as 8949 or Schedule D), or unnecessary audit exposure.

Experienced CPAs stay current on guidance from the IRS, FINCEN, and tax courts. They also know how to deal with gray areas—like staking rewards or wrapped tokens—where regulations are still being interpreted. When in doubt, the best defense is clear documentation and professional advice rooted in real-world crypto knowledge.

Don’t Let Opportunity Turn Into Regret

Crypto investing holds enormous potential, but it also demands responsibility. In a space where the rules aren’t always obvious, and the paper trail isn’t neatly provided, mistakes are easy to make—and hard to unwind.

The best time to organize your records, evaluate your transactions, and create a clear tax strategy is before tax season arrives. Whether you’re just getting started or you’ve already made a dozen trades this year, a conversation with a knowledgeable CPA can go a long way.

by Kate Supino