Short Answer 
The IRS classifies cryptocurrency as property, meaning transactions can have tax implications and must be reported. Taxable events include converting or selling cryptocurrency, exchanging between cryptocurrencies, or using it for purchases, all of which require reporting capital gains or losses based on the fair market value.
Step 1: Understand Cryptocurrency Tax Classification
The IRS classifies cryptocurrency as property, which means transactions involving it can have tax implications. It’s essential to recognize that any exchange, sale, or expenditure of cryptocurrency may trigger a taxable event. Keep this classification in mind when reporting transactions to the IRS.
Step 2: Report Conversions and Sales
Any time you convert cryptocurrency into dollars or sell it directly, you must report these transactions. Each of these actions is treated as a sale of property. You should calculate and report any capital gain or loss based on the difference between the cost basis (purchase price) and the amount you received when converting or selling.
- Converting cryptocurrency to dollars
- Selling cryptocurrency
Step 3: Track Exchanges and Spending
Exchanging one cryptocurrency for another, like Bitcoin for Ethereum, is also a taxable event. You must report the fair market value at the time of the exchange. Additionally, using cryptocurrency to purchase goods or services, like a plane ticket, requires reporting any capital gain or loss by comparing its fair market value at purchase to its original cost basis.
- Exchanging one cryptocurrency for another
- Using cryptocurrency to buy goods or services