🎯 In 30 seconds: Crypto assets are digital tokens recorded on a shared ledger called a blockchain. Prices swing far more than stocks, nothing is federally insured, and payments cannot be pulled back. You can own bitcoin through an ETF in an ordinary brokerage account, through a crypto exchange, or in your own wallet. For taxes, the IRS treats crypto as property, and brokers now report your sales on Form 1099-DA.
What you are buying
- Bitcoin: the first and largest. Its software limits the total that can ever exist.
- Other coins and tokens: thousands of them, many tied to particular networks or apps; many have failed.
- Stablecoins: tokens designed to hold a steady value, usually $1, backed by reserves. They are not bank deposits.
- Meme coins and NFTs: value driven almost entirely by attention.
None of these pays earnings or interest by itself. In announcing the first spot bitcoin ETF approvals on January 10, 2024, the SEC chair called bitcoin primarily a speculative, volatile asset and stressed the SEC was not approving or endorsing bitcoin itself.
Three ways to own it
| Spot bitcoin ETF | Crypto exchange account | Your own wallet | |
|---|---|---|---|
| Who holds the coins | The fund’s custodian | The exchange | You, through your private keys |
| Where you buy | Any brokerage, including many IRAs | The exchange’s app | You move coins from an exchange |
| Main risk besides price | Fund fees | The exchange failing, freezing withdrawals or being hacked | Losing your recovery phrase means losing the coins forever |
| Tax form for sales | Like other fund shares | Form 1099-DA | Often none; you keep the records |
Brokerage protection from SIPC does not cover crypto (see Check your broker and adviser). An ETF removes the risk of a lost key or a failed exchange, not the risk of the price falling.
Worked example: sizing and a sale
Kim has a $20,000 portfolio and decides on 3% in bitcoin: $600. If bitcoin falls 75%, as it has more than once from a peak, she loses $450, about 2.25% of the whole portfolio. Painful but survivable. The same fall on a 50% position would cut the portfolio by more than a third.
Later Kim sells some coins she bought on an exchange:
| Bought 0.05 BTC for $3,000 plus a $30 fee | Cost basis $3,030 |
| Sold for $4,000 minus a $40 fee | Proceeds $3,960 |
| Gain | $930 |
| Held more than one year? | Long-term rates (0/15/20%); one year or less is taxed as ordinary income |
Swapping one coin for another, or paying for something with crypto, also counts as a sale for tax purposes. Rewards from staking or mining are ordinary income when received.
Taxes and Form 1099-DA
- The IRS treats digital assets as property, not currency. Form 1040 asks every filer a yes-or-no question about digital asset activity.
- Brokers, including US crypto exchanges, must report gross proceeds on Form 1099-DA for transactions on or after January 1, 2025.
- For digital assets acquired on or after January 1, 2026 and kept in the same broker account, the broker must also report cost basis. For coins bought earlier, the basis box may be blank and you supply it from your own records.
- Brokers may skip reporting small totals of qualifying stablecoin sales (up to $10,000 a year) and certain NFT sales (up to $600 a year) under optional methods.
- You must report every sale and gain or loss, on Form 8949, whether or not you get a form.
Keep a record of every purchase: date, amount, price and fees. See How investments are taxed for the gain rates.
Scams to recognize
- Anyone who demands payment in crypto, especially a “government agency,” utility or employer. Real ones do not.
- Guaranteed or risk-free returns, or a trading “mentor” met online or through a dating app.
- A site or app that shows big gains but charges “fees” or “taxes” before you can withdraw.
- QR codes, pop-ups or links that ask you to connect a wallet or type in a recovery phrase.
Checklist before buying
- Emergency fund and the core portfolio come first.
- Pick a size you could lose most of without changing your life.
- Decide: ETF in a brokerage, or coins on an exchange or in a wallet.
- If you hold your own keys, store the recovery phrase offline and never type it into a website.
- Start a purchase log for taxes on day one.
- Kim holds 3% of $20,000 in bitcoin. If it falls 75%, how much of her portfolio does she lose? Answer: $450, about 2.25%.
- From what date must brokers report crypto sale proceeds on Form 1099-DA? Answer: Transactions on or after January 1, 2025.
- Does SIPC protect crypto held at a brokerage? Answer: No.
- Is trading one coin for another a taxable event? Answer: Yes; it counts as a sale.