How to Prepare Your Crypto Taxes if the Senate Bill Passes

Prepare now: practical tax moves if the Senate crypto reporting bill becomes law

Hook: If you trade, stake or hold crypto, a new Senate draft bill introduced in January 2026 could make 2026 the first tax year when exchanges must send the IRS detailed cost-basis reports for crypto—similar to stock 1099-Bs. That means missing, messy or unverifiable records could trigger audits, unexpected tax bills and penalties. This guide gives a step-by-step plan for individuals and active traders to get compliant, protect cost basis, and manage cash-flow risk ahead of possible new reporting and exchange information-sharing obligations.

Executive summary — what to do this quarter

• Start a centralized records system today: export histories from every exchange, wallet and DeFi platform and store a verified ledger.
• Choose and document a cost-basis method (FIFO, HIFO, Specific ID) and use consistent reporting tools.
• Reconcile 1099s — and expect exchanges to send IRS-matching forms if the bill passes.
• Evaluate trader vs investor status and consider a Section 475 mark-to-market (MTM) election if you qualify and the math favors it.
• Plan estimated tax payments to avoid underpayment penalties for larger, realized gains.
• Lock down self-custody and privacy practices—exchanges will share information, but you must still track on-chain activity for tax events.

Context: Why this matters in 2026

In January 2026 U.S. senators introduced draft legislation to define crypto market rules and clarify regulator jurisdiction; the bill also contains provisions likely to expand exchange reporting requirements and information-sharing with the IRS. Industry negotiations continued into early 2026 after some exchanges reevaluated support for the bill. If enacted, the law would accelerate the IRSs shift toward broker-style reporting for crypto and reduce the historical gap between exchanges' records and taxpayers' returns.

Practically, this changes two things for most taxpayers in 2026–2027:

1. Data matching at scale: exchanges would be required to send IRS-matching forms with proceeds and, in many drafts, cost basis and gains/losses—creating automated IRS cross-checks.
2. Broader broker definition: custodial platforms, some DeFi intermediaries, and stablecoin issuers may fall into reporting categories, increasing the volume of third-party information returns.

Immediate checklist: 7 actions to take this tax year

1. Export and validate full transaction histories

   Get CSV/JSON exports from every exchange and wallet for all years you hold crypto. For on-chain wallets, use block explorers or portfolio tools to export transaction lists. Validate totals: deposits, withdrawals, trades, swaps, airdrops, staking rewards and fees.

2. Aggregate records into one system

   Use accounting/tax software (TaxBit, CoinTracker, Koinly, TokenTax) or a robust spreadsheet to consolidate transactions by wallet address and exchange account. Keep a checksum: reconcile ending balances and fiat inflows to bank statements.

3. Choose your cost-basis method and document it

   Common methods: FIFO (first-in-first-out), HIFO (highest-in-first-out), Specific Identification. Document your method in writing before filing—consistency matters. Specific-ID requires clear records of which lots were sold; dont wait for the IRS to ask.

4. Reconcile staking, lending and DeFi income

   Treat staking rewards, liquidity mining and interest as ordinary income when received (fair market value at receipt). Keep timestamps and USD values—these are often the biggest mismatch points between taxpayer filings and exchange reports.

5. Compute realized gains and losses per lot

   Identify where unrealized gains might convert to realized tax liabilities. If you expect the bill to require exchanges to report both proceeds and basis, ensure lot-level gain/loss numbers are defensible.

6. Estimate 2026 tax liability and make quarterly payments

   If you had large gains in late 2025 or expect to in 2026, consider increasing estimated payments or safe-harbor withholding to avoid underpayment penalties.

7. Retain audit-ready records for 7 years

   Store raw exports, signed receipts, KYC documentation, and reconciliations. If exchanges begin sending IRS-matching statements, the IRS will expect taxpayers to produce matching records.

Step-by-step plan for individuals (HODLers and casual traders)

Step 1: One master ledger

Create a single master ledger that includes:

• Transaction date/time (UTC)
• Type (buy, sell, swap, send, receive, staking reward)
• Quantity and token
• USD value at event time (use exchange timestamp or a recognized price aggregator)
• Tx IDs and wallet addresses

Step 2: Reconcile all deposits and withdrawals

Cross-check exchange statements with bank records (fiat on/off ramps). If an exchange sends a 1099-like form showing proceeds, you must be able to match the deposits that established cost basis.

Step 3: Loss harvesting and long-term planning

If you have unrealized losses, plan tax-loss harvesting before year-end to offset gains. But be cautious: the Senate draft increases visibility into trades, reducing opportunities to obscure wash-sale-like behavior with quick transfers between accounts.

Step 4: Prepare for third-party reporting

Expect an influx of IRS-matching forms. Keep your email and contact info current with exchanges so their 1099/1099-B equivalents reach you January–February. When you receive a form, reconcile it immediately—mistakes in basis or proceeds happen and are easiest to fix early.

Step-by-step plan for active traders and professionals

Active traders face higher stakes: frequent trades, margin, lending, swaps and derivatives create more reporting complexity. Follow a stricter workflow.

Step 1: Accounting cadence — daily/weekly close

Implement a daily or weekly trade export and reconciliation to your master ledger. Even small mismatches multiply with high-frequency trading.

Step 2: Consider the Section 475 mark-to-market (MTM) election

If you qualify as a trader in securities or commodities, a Section 475 mark-to-market (MTM) election (filed by the tax-year deadline for the election) can convert capital gains/losses into ordinary income/losses and eliminate the need to track lot-level cost basis. But:

• MTM can increase ordinary income in high-profit years.
• It changes how net operating losses are handled.
• It requires a timely election—consult a CPA experienced with crypto trader status and IRS audits.

Step 3: Treat derivatives & margin properly

Derivatives and margin trades can create short-term income, lending fees or interest deductions. Ensure your accounting captures realized P&L on closed positions and distinguishes them from token transfers used as collateral.

Step 4: Build a compliance SOP

Document standard operating procedures for trade approvals, record retention, reconciliation steps, and escalation paths for discrepancies on exchange-issued forms.

Reconciling exchange forms (1099-style reports) — practical workflow

1. When you receive a 1099-B/1099-like: immediately compare totals (proceeds, cost basis, gross proceeds) to your master ledger.
2. Flag differences: basis mismatch, missing disbursements, contradictory proceeds.
3. Open a support ticket with the exchange and capture the ticket ID and timestamp.
4. If unresolved 30 days before filing, document your reconciliation steps and be prepared to include an explanatory statement with your return.

Cost-basis strategies and pitfalls

With enhanced reporting, cost-basis selection is more consequential. Key considerations:

• FIFO is simple and conservative for many long-term holders.
• HIFO may reduce short-term gains but requires reliable lot identification.
• Specific ID gives precision but is audit-prone unless you maintain timestamped, immutable records showing which lot you sold.

Document your choice in a dated statement stored with your tax files. If the IRS updates guidance in response to the Senate bill, youll need the trail to justify your method.

DeFi, bridges and cross-chain swaps — how to track complex events

DeFi introduces many new taxable events: token swaps, liquidity withdrawals, yield earned and airdrops. If reporting expands to intermediaries or bridging services, expect them to report on inflows/outflows that become IRS-matching events.

• For swaps: capture both tokens' USD values at the swap time; some protocols dont provide exports—use reliable price oracles and block timestamps.
• For bridges: separate the cross-chain transfer (non-taxable movement of the same asset) from a swap or mint event that may create taxable income.
• For liquidity provisioning: when you remove liquidity, calculate proceeds as the USD value of tokens received minus your basis in the LP tokens; record the initial LP token acquisition basis.

Security, privacy and KYC maintenance

Stronger reporting means platforms will request and retain more KYC data. Protect yourself:

• Keep identity documents current and stored securely.
• Use dedicated email and 2FA for exchange accounts.
• When using self-custody, maintain immutable, timestamped records linking wallet addresses to your identity where necessary (screenshots of signed messages can help for audits).

Software and professionals — who to hire and which tools to use

Tools that integrate multi-exchange imports, cost-basis attribution and IRS-ready reports save time and reduce error. Popular choices in 2026 include TaxBit, CoinTracker, Koinly, and TokenTax. For complex positions and trader-status elections, hire a CPA or tax attorney with crypto experience.

Selection criteria for software/professional help:

• Supports lot-level tracking and Specific-ID.
• Has reconciliation features for 1099-B-style imports.
• Can handle DeFi and staking events.
• Offers audit defense or at least detailed exportable workpapers.

Example scenarios (real-world style)

Case A — The long-term HODLer

Anna bought BTC in 2017 and never sold. In 2026 she converted a small portion for a home deposit. Her exchange now sends an IRS-matching form showing proceeds but not cost basis. Annas action plan: use stored CSVs and on-chain records to establish acquisition date and cost basis; if the exchanges basis is blank or incorrect, include a reconciliation statement and be ready for IRS notice.

Case B — The active trader

Marcus trades spot, futures and provides liquidity. He qualifies to be evaluated for Section 475. Immediate steps: consult his CPA, run a projected 3-year comparison of capital gains vs ordinary income under MTM, and document trader-business activities and hours. If MTM helps, file the election timely and change bookkeeping systems to daily P&L.

What to expect from exchanges and the IRS

If the Senate bill passes, expect a phased rollout: exchanges will update reporting engines, start issuing IRS-matching forms in January following the legislation, and the IRS will issue guidance clarifying broker definitions, basis rules and treatment of DeFi intermediaries. This means taxpayers must be ready earlier than in previous cycles: build processes now for 2026 filings and have contingency plans if exchanges misreport.

Tip: Hold a quarterly "tax close"—export and reconcile all activity at the end of each quarter so year-end is a review, not a scramble.

Common questions and quick answers

Will exchanges report cost basis to the IRS?

Drafts indicate expanded reporting that could include cost basis for brokered trades, but final language is uncertain. Prepare as if they will—document basis carefully.

Will wash-sale rules apply to crypto?

As of early 2026, wash-sale expansion to crypto has been discussed but is not law. Even without wash-sale rules, aggressive wash-sale-style behavior can attract scrutiny when exchanges and the IRS have matched data. Keep harvests and transfers transparent and well-documented.

What if an exchange misreports my gains?

Document your reconciliation and open support tickets immediately. If unresolved, attach a statement to your return explaining differences and maintain the paper trail for potential IRS notice responses.

7-point year-end tax-prep checklist

1. Export full 2026 transaction histories from all platforms by December 31, 2026.
2. Reconcile exchange 1099-style forms as soon as they arrive in January/February 2027.
3. Lock in and document your cost-basis accounting method.
4. Estimate taxes and make quarterly payments if you expect large realized gains.
5. Review whether trader status and a Section 475 election fit your situation.
6. Keep seven years of raw exports and reconciliations.
7. Maintain an audit response plan and a list of qualified crypto tax professionals.

Final takeaways and next steps

The January 2026 Senate draft marks a watershed moment: the U.S. appears likely to move toward broker-style reporting for crypto, shrinking the informational advantage some taxpayers previously used to simplify filings. The best defense is a proactive record-keeping and tax-planning routine started now.

Actionable next steps: export all exchange/wallet histories today, choose and document your cost-basis method, run a tax projection for 2026, and schedule a consultation with a crypto-savvy CPA before April 2027. If you trade actively, evaluate the Section 475 election with professional help.

Call to action

Dont wait for the bill to land—prepare now. Download our free Crypto Tax Prep Checklist, subscribe for weekly legislative updates, or book a 30-minute consultation with a coinpost-recommended crypto tax CPA to get a personalized plan. The window to organize records and make timely elections closes fast—act today.

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