Which Cryptocurrency Transactions Does Sydney Need to Report to the IRS?
Sydney bought cryptocurrency and then converted some to dollars, sold some, exchanged her bitcoin for ethereum, and used some to buy a plane ticket. Many people ask: which actions involving cryptocurrency does Sydney need to report to the IRS for tax purposes? This comprehensive guide explains exactly which transactions are taxable, how to report them, and tips for staying compliant with cryptocurrency tax rules in 2025.
Quick Answer: What Sydney Must Report
The IRS treats cryptocurrency as property, so most dispositions of crypto are taxable. Specifically, Sydney must report the following actions:
- Converting cryptocurrency to dollars (capital gains/losses)
- Selling cryptocurrency for cash (taxable gain/loss)
- Exchanging one cryptocurrency for another (e.g., Bitcoin for Ethereum — taxable event)
- Using cryptocurrency to purchase goods or services, such as a plane ticket (taxable gain based on fair market value)
Buying cryptocurrency itself is not taxable and does not need to be reported, but cost basis must be tracked for future reporting.
Why the IRS Treats Cryptocurrency as Property
IRS Notice 2014-21 classifies cryptocurrency as property, not currency. This designation means:
- Any disposal or sale of cryptocurrency is a potentially taxable event.
- Capital gains tax applies to the difference between the cost basis and the value at disposition.
- Crypto-to-crypto exchanges, crypto-to-fiat conversions, and crypto purchases of goods/services all trigger reporting obligations.
Understanding this is crucial for Sydney, especially given recent IRS enforcement on cryptocurrency tax compliance.
Breaking Down Sydney’s Cryptocurrency Transactions
1. Converting Cryptocurrency to Dollars
When Sydney converts crypto to dollars, she is effectively selling that cryptocurrency. This is a taxable event. To report properly, she must calculate:
- Cost basis: The amount originally paid for the crypto.
- Proceeds: The USD value received from the conversion.
- Capital gain/loss: Proceeds minus cost basis.
Example: Sydney bought Bitcoin for $2,000 and converted it to $3,000. She has a $1,000 taxable capital gain.
2. Selling Cryptocurrency for Cash
Selling cryptocurrency is treated the same as converting it to dollars. Sydney must report any gains or losses. Capital losses can offset gains or, in certain cases, reduce taxable income up to IRS limits.
3. Exchanging Bitcoin for Ethereum
Crypto-to-crypto exchanges are taxable events. Sydney must:
- Determine the cost basis of the Bitcoin she exchanged.
- Calculate the fair market value of Ethereum received at the time of the exchange.
- Report the capital gain or loss on her tax return.
4. Using Cryptocurrency to Buy Goods or Services
When Sydney uses crypto to buy a plane ticket, the IRS treats it as a disposition of property. She must:
- Determine the fair market value of the crypto at the time of purchase.
- Calculate the gain/loss based on cost basis.
- Report it on Form 8949 and Schedule D.
5. Buying Cryptocurrency
Purchasing cryptocurrency is not a taxable event. Sydney does not need to report purchases, but she must keep detailed records of the cost basis for future taxable events.
Recordkeeping and Reporting Requirements
Sydney should maintain accurate records of all cryptocurrency transactions, including:
- Date and time of each transaction
- Type and amount of cryptocurrency
- USD value at the time of the transaction
- Cost basis and proceeds
- Purpose of the transaction (sale, exchange, purchase, or payment)
Proper documentation ensures accurate calculation of gains/losses and smooth IRS reporting.
Filing Forms for Cryptocurrency Transactions
- Form 8949: Report each cryptocurrency transaction with cost basis, proceeds, and gain/loss.
- Schedule D: Summarize total capital gains and losses from cryptocurrency and other investments.
- 1099-K / 1099-B: Use exchange-provided forms to reconcile reporting.
FAQ — Cryptocurrency Reporting
1. Which cryptocurrency transactions does Sydney need to report to the IRS?
Sydney bought cryptocurrency and then converted some to dollars, sold some, exchanged her bitcoin for ethereum, and used some to buy a plane ticket. She must report all taxable dispositions: conversions, sales, crypto-to-crypto trades, and purchases of goods/services.
2. Is buying cryptocurrency taxable?
No. Buying crypto with cash is not taxable. Sydney does not report purchases but must track cost basis for future reporting.
3. Are crypto-to-crypto trades taxable?
Yes. Trades between cryptocurrencies are taxable. Gains or losses are calculated using the fair market value of the cryptocurrency received at the time of trade.
4. Do small purchases using crypto need reporting?
Yes. Even using crypto for small items, like plane tickets or coffee, is a taxable disposition. Gains or losses must be calculated and reported.
5. How long should Sydney keep records?
The IRS recommends keeping cryptocurrency transaction records for at least 3–7 years, depending on deductions claimed and the type of transaction.
Strategies to Stay Compliant
- Use crypto tax software or exchange-generated reports to track transactions.
- Consistently calculate gains/losses using FIFO, LIFO, or specific identification methods.
- Keep screenshots, receipts, and transaction logs for all trades and purchases.
- Consult a tax professional for complex transactions, international crypto, or DeFi investments.
Conclusion
To summarize, Sydney bought cryptocurrency and then converted some to dollars, sold some, exchanged her bitcoin for ethereum, and used some to buy a plane ticket. Which actions involving cryptocurrency does Sydney need to report to the IRS for tax purposes? All dispositions—including conversions to dollars, trades, sales, and purchases of goods/services—must be reported. Buying crypto itself is not taxable. Keeping accurate records and filing Form 8949 and Schedule D ensures compliance and avoids penalties.