Cryptocurrency Taxes Explained

Cryptocurrency taxes are no longer a niche concern. As digital assets like Bitcoin, Ethereum, and stablecoins have become mainstream investments and payment tools, the IRS has made crypto tax compliance a priority. Taxpayers who ignore crypto activity—intentionally or not—can face penalties, audits, and interest.

This guide explains how cryptocurrency taxes work, covering taxable events, reporting requirements, IRS enforcement, and practical strategies. If you have bought, sold, earned, staked, mined, or spent crypto, this resource will help you understand your obligations and avoid common mistakes.

Do You Have to Pay Taxes on Cryptocurrency?

Many taxpayers are surprised to learn that crypto taxes apply more broadly than they expect.

Why the IRS Taxes Cryptocurrency

The IRS classifies cryptocurrency as property, not currency. This classification dates back to IRS Notice 2014-21 and means crypto is taxed similarly to stocks or real estate. Any time property is sold or exchanged, a taxable event may occur.

Because crypto is treated as property, even small transactions—like spending crypto on everyday purchases—can trigger tax consequences. That makes crypto tax compliance more complex than traditional cash transactions.

When Crypto Becomes Taxable

Crypto becomes taxable when you dispose of it or receive it as income. Disposal includes selling, trading, or spending crypto. Receiving crypto through mining, staking, or payment for services is taxable as income at fair market value. Simply buying crypto and holding it in a wallet does not create a tax obligation. However, recordkeeping should begin the moment you acquire it.

Common Misconceptions

A common myth is that crypto transactions are "off the radar." Blockchain activity is permanent, traceable, and increasingly monitored by the IRS. Another misconception is that if you do not receive a tax form, you do not owe taxes—which is incorrect.

How Cryptocurrency Is Taxed by the IRS

The IRS treats cryptocurrency as property, not currency. That means gains and losses from crypto follow the same rules as stocks, real estate, or other capital assets. How your crypto is taxed depends on how you use it and how long you hold it.

Capital Gains vs Ordinary Income

When you sell, trade, or spend crypto you already own, the IRS treats the profit as a capital gain or loss. When you receive crypto as compensation—such as payment for work, mining rewards, staking income, or airdrops—it is taxed as ordinary income at fair market value when received.

Short-Term vs Long-Term

If you hold crypto for one year or less before selling or exchanging it, any gain is short-term and taxed at your ordinary income tax rates (the same as wages). If you hold it for more than one year, the gain qualifies as long-term and is taxed at preferential capital gains rates—0%, 15%, or 20% depending on your income.

Why Timing Matters

Holding crypto for more than a year can significantly reduce your tax bill. For example, a taxpayer in the 24% ordinary income bracket would pay 15% on long-term gains instead—a meaningful savings on large gains. Strategic timing of sales can also help you harvest losses to offset gains. See our Form 1099-B capital gains guide for more on reporting.

Capital Gains Tax Rates for Cryptocurrency

Long-term capital gains from cryptocurrency are taxed at 0%, 15%, or 20% based on your taxable income and filing status. The thresholds below apply to tax year 2026 and are adjusted annually for inflation.

How to Calculate Crypto Capital Gains and Losses

Calculating gains and losses requires knowing your cost basis and the fair market value at the time of each taxable event. The basic formula is: Gain or Loss = Fair Market Value at Disposal − Cost Basis.

Cost Basis

Cost basis is generally what you paid for the crypto, including purchase price, fees, and commissions. For crypto received as income (mining, staking, airdrops), your cost basis is the fair market value when you received it. If you received crypto in a trade, your cost basis is the fair market value of what you gave up.

Fair Market Value

Fair market value is the price at which the crypto would change hands between a willing buyer and seller on the transaction date. For exchange-traded crypto, use the price on the exchange at the time of the transaction. For less liquid assets, you may need to use a reasonable method and document it.

Netting Gains and Losses

Short-term gains and losses are netted together; long-term gains and losses are netted separately. If you have both, you combine them on Schedule D. Net capital gains are added to your income. Net capital losses can offset gains and, if losses exceed gains, up to $3,000 of excess loss can reduce ordinary income each year. Remaining losses carry forward to future years.

Common Crypto Transactions

Not every crypto action is taxable. Here is how the IRS treats the most common transactions.

Cryptocurrency as Income

When you receive crypto instead of cash, it is taxable as ordinary income at the fair market value on the date you receive it. That value becomes your cost basis when you later sell or exchange it.

Getting Paid in Crypto

If you are paid in Bitcoin, Ethereum, or another digital asset for services or work, report the fair market value as wages or self-employment income. Self-employed taxpayers report it on Schedule C.

Mining

Mining rewards are taxable as ordinary income when received. If mining is a trade or business, expenses may be deductible. Casual miners report the value of rewards as other income.

Staking

Staking rewards are generally taxable as ordinary income when you have dominion and control over them. The IRS has not issued final guidance on all staking scenarios, so document your approach and consider professional advice.

Airdrops

Free tokens received through airdrops are taxable as ordinary income at fair market value when you receive them. If you later sell them, you will have a separate capital gain or loss.

Are Any Crypto Transactions Tax-Free?

Some crypto activities do not trigger immediate tax. Knowing which ones helps you avoid over-reporting and plan better.

Overview of Crypto Tax Reporting Changes 2025-2026

New reporting rules for digital assets are rolling out in 2025 and 2026. Brokers must report more detail to the IRS, and taxpayers must reconcile their records with these forms.

Form 1099-DA

Starting in 2025, brokers must issue Form 1099-DA for digital asset sales and exchanges. The form reports gross proceeds; cost basis reporting becomes mandatory in 2026. Even if you do not receive a form, you must still report all taxable crypto activity.

Dual-Classification

Some crypto may be reported as both a security and a commodity, depending on how it is used. Brokers may use different classifications; you should ensure your return is consistent with the forms you receive and your own records.

DeFi Exemptions

Certain DeFi activities—such as staking, lending, liquidity provision, and token wrapping—have temporary exemptions from broker reporting until 2027–2028. You are still required to report and pay tax on these activities; the exemption only affects whether a broker must issue Form 1099-DA.

Can the IRS Track Cryptocurrency?

Yes. The IRS has significant tools to identify unreported crypto activity. Blockchain transactions are public and permanent; analytics firms can trace flows between addresses. Exchanges must collect customer information and report to the IRS under existing rules, and Form 1099-DA will expand that data.

The IRS has also used summonses and partnerships with exchanges to obtain account data. Failing to report crypto can lead to audits, penalties, and interest. The Form 1040 digital asset question requires you to disclose whether you had any crypto transactions during the year—answering incorrectly can increase audit risk.

Recordkeeping Best Practices

Good records are the foundation of accurate crypto tax reporting. Without them, you may overpay, underreport, or struggle during an audit.