As digital assets reshape the global economy, cryptocurrency taxation has become a pressing concern for investors, traders, and businesses alike. The IRS has issued clear guidelines: virtual currencies such as Bitcoin, Ethereum, and other digital assets are taxable property, not legal tender. Whether you’re mining coins, staking for rewards, or transacting in crypto, understanding your tax obligations is essential to avoid costly mistakes.

At The Law Office of Pietro Canestrelli, A.P.C., we help clients from our offices in Temecula and San Diego, California, and proudly serve individuals and businesses throughout the United States. As a leading cryptocurrency tax attorney firm, we offer IRS representation, tax planning, and reporting solutions that protect your financial future.

IRS Treatment of Cryptocurrency: Property, Not Currency

According to IRS Notice 2014-21, digital currencies are treated as property for tax purposes. This means each transaction involving cryptocurrency is a potential taxable event, regardless of whether the asset is converted to U.S. dollars.

Unlike fiat money, where tax is often only triggered when income is received or spent, crypto triggers tax liabilities upon buying, selling, trading, or using tokens in any way. As an experienced crypto tax lawyer, we help clients understand which transactions must be reported and how to calculate liabilities correctly.

Taxable Events in Crypto Transactions

Per the IRS FAQ on Virtual Currency Transactions, the following scenarios are considered taxable and must be reported:

• Selling crypto for fiat currency (e.g., USD)

• Trading one cryptocurrency for another (e.g., BTC to ETH)

• Using crypto to purchase goods or services

• Earning crypto as income or freelance compensation

• Receiving crypto through airdrops, hard forks, or staking rewards

As a cryptocurrency tax attorney, we ensure each transaction is properly documented, including the date, fair market value (in USD), and cost basis, to support accurate filing and IRS compliance.

Capital Gains vs. Ordinary Income in Crypto Taxation

The IRS distinguishes between capital gains and ordinary income when it comes to virtual currency taxation, and both require distinct reporting approaches.

Capital Gains on Cryptocurrency

When you sell or exchange cryptocurrency, you may owe capital gains tax. The gain is calculated by subtracting your cost basis (what you paid for the asset) from the fair market value at the time of sale or exchange.

• Short-term capital gains apply to assets held for one year or less and are taxed at your ordinary income rate (10%–37%)

• Long-term capital gains apply to assets held longer than one year and are taxed at preferential rates (0%–20%)

For example, if you purchased 1 Bitcoin for $30,000 and sold it a year later for $50,000, the $20,000 profit would be taxed as a long-term capital gain. Proper tracking of cost basis and sale dates is essential, which is why working with a crypto tax lawyer is highly recommended.

Refer to IRS Publication 544 for detailed guidance on capital asset dispositions.

Ordinary Income from Crypto Activities

Certain cryptocurrency activities generate ordinary income instead of capital gains. These include:

• Crypto earned from mining operations

• Staking rewards received for participating in proof-of-stake networks

• Crypto payments for goods or services rendered

• Tokens acquired through airdrops or hard forks

Under Internal Revenue Code § 61(a), these forms of income must be reported at their fair market value on the day they are received. If these earnings are part of a business or self-employment, you may also owe self-employment tax (15.3%).

IRS Rev. Rul. 2019-24 offers specific instructions on how to treat hard forks and airdrops for federal tax purposes.

Common Cryptocurrency Tax Filing Mistakes

Many taxpayers unintentionally misreport or omit crypto income. Here are some frequent missteps that our IRS crypto reporting rules consultations help clients avoid:

1. Assuming No Sale = No Tax
   Simply holding crypto isn’t taxable — but trading or spending it is. Every movement of virtual currency can create a taxable event.

2. Neglecting Cost Basis Tracking
   Without documentation, taxpayers may overstate profits and overpay taxes. A cryptocurrency tax attorney can help reconstruct your cost basis when records are incomplete.

3. Ignoring Foreign Account Requirements
   If you store crypto on international exchanges, you may need to file under the FBAR or FATCA rules. Learn more about FBAR reporting for crypto.

4. Forgetting to Report Forks and Airdrops
   The IRS treats these events as ordinary income, even if you never sold or spent the new tokens.

Behind on Your Crypto Taxes? You Still Have Options

If you’ve failed to report crypto transactions in past years, it’s not too late. As a seasoned crypto audit defense law firm, we help clients use IRS compliance programs to catch up and reduce penalties.

Options may include:

• Amending previous returns for unintentional omissions

• Using the Streamlined Filing Compliance Procedures for non-willful violations

• Participating in the Offshore Voluntary Disclosure Program (OVDP) for foreign-held crypto

Timely action and expert legal representation are critical to minimizing exposure.

How Our Crypto Tax Law Firm Can Help

At The Law Office of Pietro Canestrelli, we provide strategic and practical tax solutions for crypto investors, traders, and business owners. Our services include:

• Tax Return Audits – Review and reconcile your crypto transaction history with IRS expectations

• IRS Audit Defense – Represent you in examinations, penalty negotiations, and appeals

• Crypto Tax Planning – Design legal strategies to reduce future tax liabilities

• Voluntary Disclosure Assistance – Support for clients who need to amend returns or catch up on reporting

• Foreign Asset Reporting – Ensure FBAR and FATCA filings are handled accurately

As a trusted California cryptocurrency lawyer with offices in Temecula and San Diego, we stay current on IRS updates and policy shifts, helping clients stay compliant while maximizing deductions and minimizing penalties. We proudly assist clients nationwide.

Trust an Experienced Crypto Tax Lawyer

Cryptocurrency investing offers massive potential — but it also invites serious tax scrutiny. With the IRS actively enforcing compliance and penalties rising for non-reporting, having a crypto tax lawyer by your side is no longer optional; it’s essential.

Whether you’re a casual investor, a high-frequency trader, or a business accepting crypto payments, The Law Office of Pietro Canestrelli, A.P.C. is here to help. With offices in Temecula and San Diego, CA, we serve clients throughout California and across the United States. Let us help you simplify compliance, avoid penalties, and protect your digital wealth.