Cryptocurrency Tax Guide
The IRS treats cryptocurrency as property, not currency. Every sale, trade, or use of crypto to buy goods and services is a taxable event. Mining, staking, and airdrops are taxed as ordinary income at their fair market value when received.
Since 2014, the IRS has classified cryptocurrency as property under Notice 2014-21. This means the same tax rules that apply to stocks and real estate also apply to Bitcoin, Ethereum, and other digital assets. When you sell crypto for fiat currency, trade one crypto for another (e.g., BTC for ETH), or use crypto to buy a coffee, you realize a capital gain or loss equal to the difference between your cost basis and the fair market value at the time of the transaction.
For example, you bought 1 Bitcoin for $30,000 in January and traded it for Ethereum when Bitcoin was worth $60,000 in July. That trade is a taxable event: you realized a $30,000 long-term capital gain (assuming you held over one year). If your marginal tax rate is 24% and you're below the NIIT threshold, you'd owe approximately $4,500 in federal tax — just for swapping one crypto for another.
Mining income, staking rewards, and airdrops are taxed as ordinary income at their fair market value when received. If you mine 0.5 Ethereum worth $1,500 at receipt, you report $1,500 as ordinary income. Later, if you sell that Ethereum for $2,000, you have a $500 capital gain. The cost basis is the $1,500 value when you received it.
Tracking and Reporting
Cryptocurrency tax software (CoinTracker, Koinly, TaxBit) can connect to exchanges via API and calculate gains automatically. The IRS Schedule 1 requires you to check a box indicating whether you received or sold crypto in the tax year. Failure to report can trigger audits, as the IRS has increased enforcement through subpoenas to major exchanges like Coinbase, Kraken, and Binance US.
FAQs
Does the wash sale rule apply to crypto?
As of 2025, the wash sale rule does NOT apply to cryptocurrency because it's classified as property, not securities. This means you can sell crypto at a loss and immediately buy it back without disallowing the loss. However, proposed legislation (including the Biden administration's tax proposals) may change this, so consult current guidance.
How do I calculate cost basis for crypto?
The IRS allows several methods: FIFO (first-in, first-out), SpecID (specific identification), and average cost (for certain assets). For most investors, FIFO is simplest but may produce larger gains in a rising market. SpecID lets you select the highest-cost lots to minimize gains. Keep detailed records of every transaction, including dates, amounts, and fair market values.
What about NFTs and DeFi?
NFTs are treated as property, so buying and selling NFTs generates capital gains or losses. Creating (minting) an NFT generates ordinary income at fair market value when sold. DeFi lending and yield farming create taxable events when you deposit, withdraw, or earn rewards. The rules are complex and evolving — consider using specialized crypto tax software and consulting a tax professional familiar with digital assets.