The IRS has been steadily narrowing the gray areas in crypto taxation. Staking rewards are now ordinary income when received per Rev. Rul. 2023-14. NFTs may be classified as collectibles subject to the 28% capital gains rate pending final guidance. Form 1099-DA broker reporting began for 2025 transactions. The wash sale exemption for crypto remains intact - OBBBA did not change it - but Congress is actively drafting legislation that would eliminate it. Anyone with significant crypto, DeFi, or NFT exposure needs to understand where the settled law ends and the open questions begin.
Settled: Crypto is property (Notice 2014-21). Sales and exchanges are capital gains events. Mining rewards are ordinary income when received. Staking rewards are ordinary income when received (Rev. Rul. 2023-14). Form 1099-DA gross proceeds reporting required for 2025 transactions.
Open / pending guidance: NFT classification as collectibles (Notice 2023-27 - IRS studying). DeFi liquidity pool taxation (no formal guidance). Crypto-to-crypto swap as taxable exchange (IRS position: yes; no formal guidance on like-kind treatment). Wash sale application to crypto (no current law; PARITY Act discussion draft pending).
Rev. Rul. 2023-14 resolved the staking income question clearly: staking rewards are included in gross income as ordinary income at the fair market value of the cryptocurrency received, in the year received. This applies to proof-of-stake validation rewards, liquid staking rewards, and similar consensus mechanism rewards. The cost basis of the received tokens equals the fair market value at receipt (the amount included in income). A subsequent sale of the staking rewards creates capital gain or loss measured from that basis.
Decentralized finance (DeFi) protocols create tax events that the IRS has not yet addressed with formal guidance. The current practitioner consensus based on general tax principles:
Depositing into a liquidity pool: When a taxpayer deposits crypto into a liquidity pool and receives LP tokens in exchange, this is likely a taxable exchange under the general property rules - the taxpayer disposes of the deposited crypto and receives LP tokens. Gain or loss is recognized at the time of deposit.
LP token income (trading fees, yield farming rewards): Income earned from providing liquidity is likely ordinary income when received, similar to interest or rental income. The yield farming rewards that protocols distribute to liquidity providers are almost certainly ordinary income on receipt under Rev. Rul. 2023-14 by analogy.
Withdrawing from a liquidity pool: Returning LP tokens and receiving crypto is a second taxable exchange. The impermanent loss experienced during the liquidity provision period is realized at this point.
IRS Notice 2023-27 announced that the IRS is studying whether NFTs should be classified as collectibles under §1(h)(5) and §408(m), subject to the 28% maximum capital gains rate rather than the 20% rate that applies to other long-term capital assets. The IRS stated it would apply a "look-through" analysis: if the NFT's associated right or asset is a collectible (e.g., an NFT representing a work of art), the NFT itself would be classified as a collectible. Final guidance has not been issued as of April 2026. The conservative position - and the one that minimizes audit risk - is to treat NFTs whose underlying assets are collectibles as themselves collectible, subject to the 28% rate.
Beginning with transactions on or after January 1, 2025, crypto brokers (centralized exchanges, and in the future certain DeFi protocols) are required to report gross proceeds from digital asset sales on Form 1099-DA. For 2025 transactions, brokers were required to report only gross proceeds and the date of sale - not cost basis or acquisition date. Basis reporting begins for covered transactions in 2026 and beyond. The default basis method for digital assets held at a single broker is FIFO unless the taxpayer specifies an alternative method (HIFO - highest in, first out - or specific identification). HIFO typically minimizes current-year gain recognition and should be elected where possible.