Crypto Taxes & Taxable Events in Michigan

Digital Wallets Have Tax Obligations Too

If you’ve spent any time in the crypto world lately—buying Bitcoin, experimenting with DeFi, or moving assets between exchanges and cold wallets—you’ve probably had the same moment many investors do during tax season:

“Wait… is that crypto taxable?”

It’s a good question. The rules around cryptocurrency taxes can feel confusing, especially as the IRS tightens reporting requirements and introduces new forms, such as Form 1099-DA. For many investors—especially W-2 employees with a growing crypto portfolio—working with a professional tax preparer is becoming the smarter move.

Crypto Is Treated Like Property

One of the biggest misunderstandings about cryptocurrency is how it’s classified for tax purposes.

The IRS treats digital assets as property, not currency. That means crypto is taxed similarly to stocks or real estate when you dispose of it. 

In practice, this means there are two main categories of crypto taxation:

1. Capital gains taxes – when you sell or trade crypto

2. Income taxes – when you earn crypto as rewards, payments, or mining income

Both federal and Michigan state taxes generally follow this framework.

What Counts as a Crypto Taxable Event?

A taxable event occurs when you dispose of crypto or receive it as income. Some investors assume taxes only apply when converting crypto to U.S. dollars—but that’s not the case.

Here are some of the most common taxable events.

Selling Crypto for Cash

If you buy Bitcoin for $10,000 and later sell it for $31,000, you have $21,000 in capital gains. That gain must be reported on your tax return.

Whether it’s taxed at short-term or long-term rates depends on how long you held the asset.

Swapping One Crypto for Another

Many investors are surprised by this one.

Trading Bitcoin for Ethereum, or swapping tokens on a decentralized exchange, is considered a taxable disposition. You must calculate the gain or loss based on the fair market value at the time of the trade. 

Even if no cash changed hands.

Spending Crypto

Using crypto to buy something—whether it’s a laptop or an NFT—also counts as a taxable event because you disposed of the asset.

Staking, Mining, and Rewards

Crypto earned through staking, mining, or rewards programs is generally treated as ordinary income when you gain control over the tokens.

The fair market value at the time you receive the reward becomes your taxable income and also your cost basis for future transactions. 

DeFi Activity

Many DeFi activities can create taxable events, including:

• Yield farming

• Liquidity pool rewards

• Derivative trading

• Certain lending transactions

Because these activities involve complex smart contracts and token swaps, reporting can quickly become complicated.

What Is Form 1099-DA?

Starting with the 2025 tax year, cryptocurrency brokers must issue Form 1099-DA to report digital asset transactions to taxpayers and the IRS. 

This form reports:

• Gross proceeds from crypto sales or exchanges

• Certain digital asset transactions conducted through brokers

However, many investors are noticing something frustrating:

Missing cost basis information.

That often happens when assets move between exchanges and personal wallets (like cold storage). When this occurs, it’s the taxpayer’s responsibility to reconstruct transaction history and calculate the correct cost basis.

If that step is skipped, the IRS could assume the entire sale amount is taxable profit. 

How Crypto Gains Are Reported

Most individual investors report crypto activity using:

• Form 8949 – listing individual crypto transactions

• Schedule D (Form 1040) – summarizing capital gains and losses 

Income from rewards or staking is typically reported separately as ordinary income.

This is where the record-keeping challenge comes in: exchanges, DeFi platforms, wallets, and bridges all create transaction histories that need to be reconciled.

What About Michigan State Taxes?

Michigan generally follows federal treatment for capital gains and income. That means:

• Crypto gains are included in Michigan taxable income

• Crypto income from staking or mining is also taxable

The state does not currently have special crypto-specific rules beyond federal guidance.

Why Crypto Investors Work With a CPA

Crypto tax reporting has become significantly more complex over the past few years. Between DeFi transactions, cross-wallet transfers, and new IRS reporting requirements, investors are often dealing with:

• Missing cost basis

• Multiple exchanges

• Thousands of transaction records

• New IRS reporting forms

That’s where a knowledgeable CPA can help translate blockchain activity into accurate tax reporting. At CPA Nerds, we enjoy digging into complex financial puzzles—especially those involving wallets, tokens, and transaction ledgers. Because sometimes the difference between a stressful tax season and a smooth one is simply having the right nerds on your side.