How the IRS Taxes Cryptocurrency
The IRS treats cryptocurrency as property, not currency. Every time you sell, trade, or spend crypto, you trigger a taxable event. If you bought ETH at $1,800 and sold at $3,500, you owe tax on the $1,700 gain—the same way you'd owe tax on selling stock at a profit. Receiving crypto as payment for goods or services is taxed as ordinary income at fair market value on the date received.
Taxable events include selling crypto for USD, trading one crypto for another (e.g., BTC to ETH), spending crypto on purchases, and receiving mining or staking rewards. Simply buying crypto with USD and holding it is not taxable. Transferring between your own wallets is not taxable. The distinction matters because many investors unknowingly trigger tax events by swapping tokens on decentralized exchanges.
Short-Term vs. Long-Term Capital Gains Rates (2025)
The holding period determines your tax rate. Assets held 365 days or less are taxed at short-term rates (your ordinary income bracket). Assets held longer than 365 days qualify for lower long-term capital gains rates. The difference is substantial—a single filer earning $100,000 pays 24% on short-term gains but only 15% on long-term gains.
| Taxable Income (Single) | Short-Term Rate | Long-Term Rate | Tax on $40K Gain |
|---|---|---|---|
| $0 – $47,025 | 10 – 12% | 0% | $0 (LT) / $4,800 (ST) |
| $47,026 – $103,350 | 22% | 15% | $6,000 (LT) / $8,800 (ST) |
| $103,351 – $197,300 | 24% | 15% | $6,000 (LT) / $9,600 (ST) |
| $197,301 – $518,900 | 32 – 35% | 15% | $6,000 (LT) / $14,000 (ST) |
| $518,901+ | 37% | 20% | $8,000 (LT) / $14,800 (ST) |
LT = long-term (held >1 year). ST = short-term (held ≤1 year). Rates shown for single filers. Married filing jointly thresholds are roughly double. Net Investment Income Tax (3.8%) may apply above $200K/$250K.
FIFO Cost Basis Method Explained
FIFO (First In, First Out) means you sell your oldest coins first. If you bought 1 BTC at $20,000 in January, another at $30,000 in March, and sold 1 BTC at $50,000 in June, FIFO matches the sale against the $20,000 purchase. Your gain is $30,000, not $20,000. This is the default method the IRS expects unless you specifically elect and document another method like Specific Identification.
FIFO tends to produce higher gains in a rising market because your oldest (cheapest) purchases are sold first. In a falling market, FIFO can produce lower gains. The IRS allows you to use Specific Identification if you can adequately identify which lots you're selling—most major exchanges (Coinbase, Kraken) now support lot selection. Choose FIFO for simplicity, Specific ID for optimization.
Tax-Loss Harvesting: Turn Losses Into Savings
If your crypto portfolio has unrealized losses, you can sell those positions to realize the loss and offset your gains. Sold ETH for a $15,000 gain but SOL is down $8,000? Sell the SOL, claim the $8,000 loss, and you only owe tax on $7,000 of net gains. If your losses exceed your gains, you can deduct up to $3,000 of excess losses against ordinary income. Remaining losses carry forward to future tax years—indefinitely.
Unlike stocks, crypto is not currently subject to the IRS wash sale rule. You can sell a coin at a loss and immediately buy it back to harvest the loss without a 30-day waiting period. Congress has proposed extending wash sale rules to crypto, but as of 2025 it hasn't passed. Take advantage while you can, but keep records. Every exchange reports to the IRS via 1099-DA starting in 2026.
Reporting Crypto on Your Tax Return
Report all crypto dispositions on Form 8949 (Sales and Dispositions of Capital Assets). Each transaction needs: date acquired, date sold, proceeds, cost basis, and gain or loss. Totals flow to Schedule D (Capital Gains and Losses). If you have hundreds of transactions, use tax software like Koinly, CoinTracker, or TurboTax Crypto to auto-import from exchanges.
The IRS added a crypto question to the top of Form 1040: “Did you receive, sell, exchange, or otherwise dispose of any digital assets?” Answering “No” when you should answer “Yes” is a red flag. Exchanges share your data with the IRS. Don't skip reporting—penalties for crypto tax evasion start at 20% of the underpayment and can escalate to criminal charges.
To see how crypto gains push you into higher brackets, use the tax bracket calculator. If you're a freelancer receiving crypto payments, the freelance tax calculator estimates your self-employment tax on that income.