How Is Cryptocurrency Taxed?
In the US, cryptocurrency is treated as property by the IRS, not currency. Selling, trading, or spending crypto triggers a taxable event — a capital gain or loss — based on the difference between the sale price and your cost basis. Staking rewards, mining income, and airdrops are generally taxed as ordinary income when received.
How Crypto Taxation Works
The IRS issued Notice 2014-21, which established that virtual currency is treated as property for federal tax purposes. This means every disposal of cryptocurrency — whether by sale, trade, gift, or purchase of goods — is a taxable event requiring you to calculate and report a capital gain or loss. The gain or loss equals the fair market value of what you received minus your cost basis in the crypto you disposed of.
Holding period determines the tax rate. If you held the crypto for more than one year before disposing of it, any gain qualifies as a long-term capital gain, taxed at preferential rates of 0%, 15%, or 20% depending on your income. If you held it for one year or less, the gain is short-term and taxed at your ordinary income rate, which can reach 37%. This distinction makes holding period tracking critically important for tax planning.
Income events are taxed differently from capital gains events. When you receive crypto as payment for services, as mining rewards, as staking income, or as an airdrop, the IRS treats the fair market value of the crypto at the time you receive it as ordinary income. You then establish a cost basis equal to that income amount, which you use when you later sell or trade the crypto. Failure to report income events — not just sales — is a common and costly mistake.
Key Points
- The IRS classifies cryptocurrency as property, not currency — every taxable disposal must be reported on Form 8949 and Schedule D.
- Crypto-to-crypto swaps are taxable disposals: trading Bitcoin for Ethereum, for example, triggers a capital gain or loss based on Bitcoin's value at the time of the swap.
- Long-term gains (held >1 year) are taxed at 0–20%; short-term gains (held ≤1 year) are taxed at ordinary income rates up to 37%.
- Staking rewards, mining income, and most airdrops are taxed as ordinary income at fair market value when received, establishing a cost basis for future disposals.
Learn More
Cost basis methods, wash sale considerations, DeFi income, and record-keeping strategies all affect your final tax bill. See Crypto Taxes & Recordkeeping for a complete guide.
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Related Questions
Do I pay taxes when I trade one crypto for another? Yes. Under IRS rules, swapping one cryptocurrency for another is a taxable disposal of the first asset. You must calculate the fair market value of the crypto you received at the time of the trade and compare it to your cost basis in the crypto you gave up. Any gain or loss must be reported, even if you never converted to US dollars.
How do I calculate my crypto cost basis? Your cost basis is the original purchase price of a crypto asset, plus any fees paid to acquire it. When you sell or trade, subtract your cost basis from the proceeds to determine your capital gain or loss. Common cost basis methods include FIFO (first in, first out), LIFO (last in, first out), and HIFO (highest in, first out) — each produces different tax outcomes depending on market conditions.