Hard cases and common tax mistakes

The rules in the last four lessons cover buying, selling, swapping and earning. Much of what Level 3 taught goes beyond them. This lesson shows where the guidance stops, how to act sensibly there, and the mistakes people make even where the rules are clear.

Where the guidance stops

The IRS's questions and answers on digital assets do not address:

• Wrapping a token.
• Putting tokens into a liquidity pool.
• Lending through a DeFi protocol.
• Liquid staking.
• Lost or stolen crypto.

The IRS has also told brokers that, for now, they need not report staking, lending and wrapping transactions on Form 1099-DA. It adds that rewards from them are still reportable.

So you have to report, and nobody has told you exactly how.

Why these cases are hard

Take liquid staking from Lesson 48. You hand over ETH and receive a different token that stands for it. There are two ways to read that:

• It is a swap. You gave one digital asset and received a different one. The general rule says exchanging one digital asset for another is a disposal, so you have a gain or loss on the ETH.
• It is a deposit. You still own the same thing in a different wrapper, so nothing has been sold.

The same question arises when you deposit into a lending protocol and receive a receipt token, as in Lesson 43, when you add to a liquidity pool, as in Lesson 42, and when you wrap a token. The IRS has not settled it.

How to act when the rule is unclear

• Record everything anyway. Dates, amounts and dollar values on the way in and the way out. Whichever reading turns out to be right, you will need them.
• Choose a treatment and apply it every year. Do not treat a deposit as a sale when that gives a loss and as a non-event when it would give a gain.
• Write down what you chose and why.
• Take advice when the sums are large. A tax professional who works with crypto is worth the fee here.

NFTs

Selling an NFT produces a gain or loss like any other digital asset. Paying for an NFT with ETH is a disposal of the ETH, so you have a gain or loss on the ETH at that moment.

One more wrinkle. Collectibles such as art have a top long-term rate of 28%. The IRS said in 2023 that, until it issues further guidance, it looks through an NFT to what it stands for when deciding whether it is a collectible.

Lost and stolen crypto

Do not assume a loss from theft, a scam or a lost seed phrase can be deducted. The IRS's questions and answers do not cover it. Ask a professional before you claim one.

The mistakes that cost most

1. "I never cashed out, so there is nothing to report." Swapping one crypto for another is a disposal. So is swapping a stablecoin.
2. "No form arrived, so there is nothing to report." The duty to report does not depend on a form.
3. Ignoring rewards until they are sold. Staking and mining rewards are income on the day you gain control of them.
4. Losing the cost basis. Coins moved between wallets keep their original cost, but only if you kept the record. A sale with no proven basis can be taxed as if the coins cost nothing.
5. Forgetting fees paid in crypto. Each one is a small disposal.
6. Not reporting losses. A reported loss reduces tax now or in later years. An unreported one does nothing.
7. Mixing up wallets. Basis is tracked separately for each wallet and account.
8. Missing the one-year mark by days. A short-term gain is usually taxed at a higher rate.
9. Leaving it all to software. Check the labels and the balances.

The law is still moving

In September 2026 a US House committee approved the Digital Asset Tax Certainty Act. Among other things it would exempt network and transaction fees of $10 or less, apply wash sale rules to digital assets and clarify the taxation of mining and staking. When this lesson was last reviewed it was not law.

Each lesson on this site shows the date it was last reviewed. For tax, also check the current position with the tax authority before you file.

Level 3 complete

You now know how DeFi works and where its yield comes from, how staking works on the inside, what an NFT is and is not, and how all of it is taxed. The same habits run through every module: know who holds the keys, know where the return comes from, read before you sign, and keep records.