The IRS treats cryptocurrency as property, not currency (IRS Notice 2014-21). This single classification drives almost all crypto tax rules — and most crypto holders get this wrong.
Every Sale Is a Taxable Event
When you sell, trade, or spend cryptocurrency, you realize a capital gain or loss. This includes:
- Selling crypto for cash
- Trading one crypto for another (BTC → ETH is a taxable event)
- Using crypto to buy goods or services
- Receiving payment in crypto (ordinary income at fair market value on receipt date)
The capital gain is: proceeds − cost basis
Where cost basis = what you paid for the crypto (including fees).
Short-Term vs. Long-Term Capital Gains
Short-term (held ≤ 1 year): Taxed as ordinary income — same rate as your salary. In 2024, that's 10%, 12%, 22%, 24%, 32%, 35%, or 37%.
Long-term (held > 1 year): Taxed at preferential rates.
- 0% if taxable income is under $47,025 (single) / $94,050 (married)
- 15% for most taxpayers
- 20% for high earners
The math matters: If you bought 1 ETH at $1,800 and sold it 13 months later at $3,200:
- Gain: $1,400
- Long-term rate (22% bracket): 15% = $210 tax
- Short-term rate (same bracket): 22% = $308 tax
Waiting one day past the 12-month mark saved $98 on this single trade. For larger positions, the difference compounds.
Cost Basis Methods
When you have multiple purchases at different prices, the IRS allows several cost basis accounting methods:
FIFO (First In, First Out) — Default method. Oldest coins sold first. Results in more long-term gains if you've held for years, but can be suboptimal if early purchases were cheap.
Specific Identification — You designate which specific coins you're selling. Requires record keeping but allows tax optimization (e.g., selling highest-cost lots to minimize gains, or selling short-term losses to offset other gains).
HIFO (Highest In, First Out) — Sell highest-cost lots first, minimizing current gains. Not universally accepted by all tax software, so verify with your accountant.
You must apply your chosen method consistently within a tax year.
Staking and Mining Income
The IRS clarified in Revenue Ruling 2023-14 that staking rewards are ordinary income in the year received, at fair market value on the date of receipt.
This means:
- You owe income tax on staking rewards the moment you receive them
- Your cost basis in those rewards equals the FMV at time of receipt
- If you later sell the rewards at a higher price, you owe capital gains on the appreciation
Example: You receive 0.5 ETH as staking rewards when ETH = $3,000. You owe income tax on $1,500 immediately. If you later sell that 0.5 ETH for $4,000, you owe capital gains on the $500 increase ($2,000 proceeds − $1,500 basis).
Mining income is also ordinary income at FMV upon receipt.
The Wash Sale Exception
Under current law (2024), the wash sale rule — which prevents you from claiming a loss if you repurchase a "substantially identical" security within 30 days — does NOT apply to cryptocurrency.
This creates a significant tax opportunity: if you have unrealized losses, you can sell, immediately repurchase the same crypto, and lock in a capital loss for tax purposes while maintaining your position.
Example: You hold 1 BTC with a $45,000 cost basis, currently worth $35,000. You sell (realizing a $10,000 loss), immediately buy 1 BTC back at $35,000 (new basis), and claim the $10,000 loss on your taxes. This can offset $10,000 in other gains, saving thousands in taxes.
Congress has discussed applying wash sale rules to crypto, but as of 2024 it has not passed. This window may close in future legislation.
Record Keeping Requirements
The IRS expects you to substantiate every transaction. You need:
- Date acquired
- Date sold/transferred
- Cost basis (purchase price + fees)
- Proceeds (sale price − fees)
- Gain or loss
If you've traded on multiple exchanges, this gets complex quickly. Crypto tax software (Koinly, CoinTracker, TaxBit, Crypto.com Tax) can aggregate across exchanges and generate Form 8949 automatically. Worth the cost if you have significant activity.
If you've lost records, block explorers (Etherscan, blockchain.com) can reconstruct on-chain history.
Form 8949 and Schedule D
Crypto capital gains are reported on Form 8949, then summarized on Schedule D.
Every single transaction goes on Form 8949 (or a statement attached to it):
- Box A (covered, short-term)
- Box B (uncovered or self-reported, short-term)
- Box D (covered, long-term)
The IRS question on Form 1040 asking "At any time during [year], did you receive, sell, exchange, or otherwise dispose of any digital assets?" must be answered Yes if you had any activity — even just receiving a small airdrop.
Special Situations
Airdrops: Ordinary income at FMV on receipt date (if you have dominion and control over them).
Hard forks: Treated similarly to airdrops — ordinary income at FMV when you receive the new coins.
NFTs: Same property rules apply. Buying an NFT with ETH is a taxable event (you're disposing of ETH). Selling an NFT is a capital gain.
DeFi: Each swap in a DeFi protocol is generally a taxable event. Providing and removing liquidity may have complex basis tracking implications.
Crypto-to-crypto: Every swap is a taxable event. If you trade BTC for ETH, you need to calculate the gain/loss on the BTC at the time of the trade.
The Bottom Line
Crypto taxes are complex but not optional. The IRS receives data from major exchanges via Form 1099-DA (new for 2025). Enforcement is increasing.
Key rules to remember:
- Every sale or trade is taxable
- Hold over 1 year for lower long-term rates
- Staking rewards are ordinary income on receipt
- Wash sale rule doesn't apply — use this strategically
- Keep records of every transaction
- Report on Form 8949, answer the digital assets question on 1040
Calculate your crypto tax: The Crypto Portfolio Tax Calculator estimates your capital gains by tax lot, compares short-term vs. long-term treatment, and shows what you owe on realized gains — with full ShowMath.