The era of anonymous cryptocurrency trading has officially ended. Beginning with tax year 2025, digital asset brokers must report transactions on the new Form 1099-DA, giving the IRS unprecedented visibility into cryptocurrency holdings and trades. For California crypto investors—already facing the nation’s highest state income tax rates—understanding the new reporting requirements and ensuring accurate compliance is more important than ever.
At the Law Office of Pietro Canestrelli, we’ve helped California cryptocurrency investors navigate the evolving tax landscape since the earliest days of Bitcoin. As a former IRS agent and California Board Certified Tax Specialist, Pietro Canestrelli understands both the technical tax code requirements and the practical challenges of cryptocurrency tax compliance. This guide explains what’s changed for 2026 and what you need to do to stay compliant.
The New Form 1099-DA: What’s Being Reported
Form 1099-DA (Digital Asset) represents the IRS’s most significant cryptocurrency enforcement tool to date. Starting with transactions in 2025, digital asset brokers must report:
Required Information
- Gross proceeds: Total sales prices from digital asset dispositions
- Date of sale: When you sold or exchanged crypto
- Transaction type: Sale, exchange, or other disposition
- Asset description: The specific cryptocurrency involved
Cost Basis Reporting (Starting 2026)
For transactions occurring in 2026 and later, brokers must also report:
- Cost basis: What you paid for the cryptocurrency
- Date acquired: When you originally purchased
- Holding period: Whether gains are short-term or long-term
Who Must Report
“Brokers” under the new rules include:
- Centralized exchanges (Coinbase, Kraken, Gemini, etc.)
- Certain decentralized finance platforms (phased implementation)
- Payment processors accepting crypto
- Digital asset kiosks
The Wallet-by-Wallet Cost Basis Rule
One of the most challenging new requirements is the wallet-by-wallet cost basis rule. Previously, taxpayers could use universal accounting methods across all holdings. Now:
- Each broker account must track cost basis separately
- Transfers between wallets don’t automatically transfer cost basis
- You must document cost basis for assets moved between platforms
This creates significant record-keeping challenges, especially for investors who have moved crypto between multiple exchanges and wallets over the years.
California-Specific Crypto Tax Rules
California adds layers of complexity for crypto investors:
No Capital Gains Preference
While federal tax law taxes long-term capital gains at preferential rates (0%, 15%, or 20%), California taxes all capital gains—including crypto gains—as ordinary income at rates up to 13.3%.
Combined with the federal 20% long-term capital gains rate and the 3.8% Net Investment Income Tax for high earners, California crypto investors face marginal rates approaching 40% on crypto gains.
Residency Complications
For crypto investors who have moved to or from California:
- Gains realized while a California resident are taxable to California
- California may claim sourcing on crypto acquired while a resident
- Residency audits increasingly examine crypto activity
What Constitutes a Taxable Event
Understanding what triggers tax liability is essential for compliance:
Taxable Events
- Selling crypto for fiat currency: Standard capital gains treatment
- Exchanging one crypto for another: Each exchange is a taxable sale
- Using crypto to purchase goods or services: Taxable at fair market value
- Receiving mining or staking rewards: Ordinary income at receipt
- Receiving airdrops: Generally ordinary income at receipt
- Earning interest from lending platforms: Ordinary income
Non-Taxable Events
- Buying crypto with fiat: No immediate tax (establishes basis)
- Transferring between your own wallets: Not taxable, but document basis
- Gifting crypto: Not taxable to giver (but may have gift tax implications)
- Donating to charity: No gain recognized (potential deduction)
Calculating Crypto Gains and Losses
The Basic Formula
Gain/Loss = Sale Price – Cost Basis – Fees
Cost Basis Methods
You must select and consistently apply a cost basis method:
- FIFO (First In, First Out): Oldest coins sold first—often results in larger long-term gains
- LIFO (Last In, First Out): Newest coins sold first
- HIFO (Highest In, First Out): Highest-cost coins sold first—minimizes gains
- Specific Identification: Choose which specific coins to sell—most flexible but requires meticulous records
The new wallet-by-wallet rules limit your ability to use methods across all holdings.
Holding Period
- Short-term: Held one year or less—taxed as ordinary income
- Long-term: Held more than one year—preferential federal rates (but ordinary income for California)
Common Crypto Tax Mistakes
Ignoring Crypto-to-Crypto Exchanges
Every time you exchange Bitcoin for Ethereum (or any crypto for any other crypto), you’ve realized a taxable event. Many investors mistakenly believe taxes only apply when converting to dollars.
Missing Mining and Staking Income
Mining rewards and staking income are taxable at receipt as ordinary income—not just when you sell. You owe tax even if you hold the rewards.
Incorrect Cost Basis
With prices fluctuating wildly, using incorrect acquisition costs creates significant errors. Broker-reported basis may be wrong, especially for assets transferred from other platforms.
Failing to Report Losses
Crypto losses can offset gains and up to $3,000 of ordinary income annually (with unlimited carryforward). Failing to report losses means missing valuable deductions.
Not Tracking Airdrops and Forks
Free tokens from airdrops or blockchain forks are taxable income at receipt. Many investors fail to report these because they didn’t actively acquire them.
DeFi and NFT Tax Complications
Decentralized Finance (DeFi)
DeFi activities create complex tax situations:
- Liquidity provision: May trigger taxable events when depositing and withdrawing
- Yield farming: Rewards are generally ordinary income at receipt
- Lending: Interest earned is ordinary income
- Wrapping tokens: Tax treatment unclear—conservative approach is to treat as taxable exchange
Non-Fungible Tokens (NFTs)
NFT transactions have unique considerations:
- Selling an NFT is a taxable event
- Creating and selling NFTs generates ordinary income (like selling other property you create)
- Collectible NFTs may face higher federal capital gains rates (up to 28%)
- Gas fees may be added to cost basis or deducted, depending on circumstances
What to Do If You Haven’t Reported Crypto
If you have unreported cryptocurrency transactions from prior years, you have several options:
Voluntary Disclosure
Coming forward before the IRS contacts you typically results in lower penalties than waiting to be caught. Options include:
- Amended returns for prior years
- Delinquent return filing
- In extreme cases, voluntary disclosure through formal IRS programs
Respond to IRS Notices
The IRS has sent thousands of notices (Letters 6173, 6174, 6174-A) to suspected crypto holders. If you receive a notice, respond promptly and accurately—ignoring IRS correspondence makes things worse.
Our guide on common IRS letters can help you understand what you’ve received.
Record-Keeping Requirements
Maintain detailed records including:
- Date and time of each transaction
- Fair market value at time of transaction
- Cost basis for each asset
- Fees paid
- Transaction IDs and wallet addresses
- Exchange statements and trade histories
Consider using crypto tax software to track transactions across multiple platforms, but verify outputs carefully.
Tax Planning Strategies for Crypto Investors
Tax-Loss Harvesting
Sell underwater positions to realize losses that offset gains. The wash sale rules that apply to stocks don’t currently apply to cryptocurrency (though this may change).
Holding Period Management
When possible, hold assets for more than one year to qualify for preferential federal rates.
Charitable Giving
Donating appreciated crypto to charity eliminates capital gains and provides a deduction. See our charitable contribution guide.
Opportunity Zone Investment
Crypto gains can potentially be deferred through qualified opportunity zone investments.
Get Expert Help With Cryptocurrency Taxes
The new reporting requirements make cryptocurrency tax compliance more important—and more complex—than ever. At the Law Office of Pietro Canestrelli, we help California crypto investors navigate tax obligations, resolve past compliance issues, and defend against IRS and FTB scrutiny.
As a former IRS agent, Pietro Canestrelli understands how the agency approaches cryptocurrency enforcement. This insight allows us to help clients resolve issues efficiently while minimizing penalties and risk.
Have cryptocurrency tax questions or concerns about past reporting? Contact our office for a consultation. We’ll help you understand your obligations and develop a plan for compliance.
