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Crypto Taxation in 2025: New Rules and Strategies for Reporting Digital Assets

Crypto Taxation in 2025: New Rules, Strategies, and the Role of LLCs

Cryptocurrency investors face new challenges and opportunities in 2025 as the IRS implements significant changes to cost-basis tracking and reporting rules. These updates, combined with the existing complexities of crypto taxation, make it more important than ever to structure your crypto activities properly and ensure accurate tax compliance. Here’s what you need to know and how forming an LLC can help.

Key Crypto Tax Cryptotaxation in 2025Updates for 2025

Elimination of the Universal Cost Basis

Starting January 1, 2025, the IRS no longer permits the universal method to track the cost basis of crypto holdings. Instead:

  • Tax basis must be calculated per wallet or account.
  • Accurate recordkeeping is essential to avoid errors and inflated taxable gains.
  • Taxpayers who didn’t take advantage of the IRS’s safe harbor relief before December 31, 2024, must now ensure compliance with wallet-specific tracking for all transactions.

Temporary Relief for FIFO Rules

The IRS has postponed the mandatory implementation of First In, First Out (FIFO) cost-basis accounting for centralized exchanges until December 31, 2025. This delay allows investors to:

  • Use alternative methods like Highest In, First Out (HIFO), or Specific Identification (Spec ID).
  • Minimize taxable gains by selecting the most tax-efficient assets to sell.

When Are Crypto Transactions Taxable?

Understanding when crypto transactions trigger taxes is crucial. Common taxable events include:

  • Selling crypto for cash or converting it to stablecoins.
  • Trading one cryptocurrency for another, such as swapping Bitcoin for Ethereum.
  • Using crypto to pay for goods or services, including purchases with crypto debit cards.

Crypto Income Examples

  • Mining or staking rewards: Ordinary income reported on Schedule C (self-employment) or Schedule 1 (other income).
  • Airdrops or hard forks: Taxable as ordinary income at the time of receipt.
  • Earning interest on lending: Reported on Schedule B as interest income.

Steps to File Your Crypto Taxes

1. Calculate Your Gains and Losses

  • Use crypto tax software such as CoinTracking.info (for international users) or TaxBit.com (for U.S. residents) to organize transactions.
  • Correct missing or duplicate transactions for accurate reporting.

2. Complete IRS Forms

  • Report capital gains and losses on Form 8949 and summarize them on Schedule D.
  • Include crypto income on Schedule 1 (or Schedule C if self-employed).

3. Report Exchange Activity

  • If your crypto exchange is tied to an LLC or S corporation, file the appropriate business tax return.

4. File Your Tax Return

  • Ensure all crypto activity is included in your personal or business tax filings.

Additional Strategies for Crypto Investors in 2025

Asset Protection with a Charging Order Protection Entity (COPE)

  • Use a Wyoming LLC or another charging order protection state to shield your crypto from personal lawsuits. This structure ensures that creditors can only receive distributions if you decide to make them, not force liquidation of your holdings.

Leveraging the Wash Sale Rule Exception

  • Crypto is not subject to the traditional wash sale rule, allowing you to sell at a loss and immediately repurchase to lock in losses for tax benefits while retaining your position.

Using a Hard Wallet for Security

  • Store your crypto on a hard wallet to avoid the risks of exchange hacks or bankruptcy. Ensure proper backup and access instructions for heirs in your estate plan.

Charitable Remainder Trusts (CRTs)

  • For highly appreciated crypto, use a CRT to defer taxes and provide income over time. This strategy is ideal for gains exceeding $500,000 and includes significant tax savings.

Diversifying Profits

  • Successful investors diversify beyond crypto, allocating profits to real estate, precious metals, or other income-producing assets to hedge against market volatility.

Roth IRA Investments in Crypto

  • Invest in crypto through a Roth IRA for tax-free growth. Gains inside the Roth IRA are not taxed, and withdrawals after age 59½ are tax-free. This strategy is particularly powerful for long-term wealth building.

Why an LLC Makes Sense for Crypto Activities

While crypto income and capital gains are generally reported on personal tax returns, forming an LLC can offer strategic advantages, particularly for asset protection and tax efficiency.

Asset Protection

  • An LLC separates your personal assets from liabilities tied to crypto activities, offering protection against lawsuits or creditors.

Tax Efficiency

  • Mining or staking operations: If you generate ordinary income from crypto, an LLC taxed as an S corporation can reduce self-employment taxes.
  • LLC for passive gains: For investors holding crypto passively, an LLC (disregarded entity) ensures simplicity while maintaining liability protection.

Structuring for Partnerships

  • If you co-own crypto holdings, an LLC taxed as a partnership provides flexibility for sharing income, expenses, and ownership rights.

Why Work with NCP for Your Digital LLC?

NCP specializes in setting up Digital LLCs for U.S. and non-U.S. residents. Our services include:

  • Streamlined LLC Formation: Tailored for crypto investors and entrepreneurs.
  • U.S. Exchange Partnerships: VIP access to U.S. exchanges for faster account setup (minimum $10K capitalization).
  • Comprehensive Tax Support: Guidance on structuring your LLC for maximum tax benefits.

Common Crypto Tax Mistakes to Avoid

Inaccurate Cost Basis Tracking

Failing to track wallet-specific cost basis or neglecting to fix missing transactions can lead to over-reporting gains or triggering an audit.

Misclassifying Income

For example, treating staking rewards as capital gains instead of ordinary income could result in IRS penalties.

Using the Wrong Entity Structure

Operating a mining or staking business without an LLC could expose personal assets to liability or higher taxes.

Ignoring State-Level Taxes

Crypto activities like mining may trigger state-level tax obligations that are easily overlooked.

2025 Crypto Compliance Made Simple

With the new IRS rules in place, it’s essential to stay ahead of compliance requirements. By leveraging the right tools, structuring your crypto activities with an LLC, and staying informed about changes, you can protect your investments and minimize your tax burden.