How Is Cryptocurrency Taxed?

How Is Crypto Taxed?

The IRS treats cryptocurrency as property, which affects how your transactions are taxed. The amount you owe depends on whether your crypto activity generates capital gains or ordinary income.

Capital gains tax applies when you sell, trade or spend cryptocurrency. The rate depends on how long you held the crypto before the transaction:

• Hold it for one year or less, and you'll pay short-term capital gains tax at ordinary income rates.
• Hold it for more than a year, and you'll pay long-term capital gains tax at preferential rates—more on that in a minute.

Ordinary income tax applies when you earn cryptocurrency through mining, staking, receiving payment for services or getting airdrops. You owe tax on its fair market value in U.S. dollars when you received it, with tax rates ranging from 10% to 37%, depending on your tax bracket.

Not every crypto transaction triggers taxes, however, so understanding which events are taxable is key for crypto investors and enthusiasts.Tax prep embed when ready

Taxable Events

You'll typically owe taxes on cryptocurrency in the following situations:

• Selling crypto for U.S. dollars: Selling Bitcoin, Ethereum or other cryptocurrencies for cash triggers capital gains tax on any profit.
• Exchanging cryptocurrencies: Trading one cryptocurrency is treated as selling the virtual currency you gave up for the new one.
• Spending crypto on goods or services: Using cryptocurrency to make purchases triggers capital gains tax.
• Earning crypto through mining: Mining rewards are taxed as ordinary income at fair market value when received.
• Receiving staking rewards: Staking income is taxed as ordinary income when you gain control of the tokens.
• Getting paid in crypto: Cryptocurrency received as payment is treated as ordinary income.
• Receiving airdrops: Free cryptocurrency from airdrops is generally taxable as ordinary income.

Nontaxable Events

The following crypto activities typically don't trigger immediate tax consequences:

• Buying and holding crypto: Purchasing cryptocurrency and holding it doesn't create a taxable event. Taxes apply only when you sell, trade or spend it.
• Transferring between your own wallets: Moving cryptocurrency between wallets you control isn't taxable.
• Gifting crypto to an individual: Giving cryptocurrency as a gift generally isn't taxable for you, though gifts of more than $19,000 in 2026 could bring the gift tax into play.
• Donating crypto to a qualified tax-exempt charity: Contributing cryptocurrency to eligible nonprofits can provide a charitable deduction without triggering capital gains tax.

How Do Capital Gains Taxes Work?

If your crypto activity generates a capital gain rather than ordinary income, the tax rate will depend on your taxable income and holding period:

• Short-term capital gains: Applies when you sell, trade or spend cryptocurrency held for one year or less. These gains are taxed at ordinary income rates based on your tax bracket.
• Long-term capital gains: Applies when you hold cryptocurrency for more than a year before selling it. These gains benefit from preferential tax rates.

The income limits and tax rates can depend on your filing status, and may change from one year to the next. Here are the tax rates for single taxpayers for the 2026 tax year (note that the income limits are generally double for married couples filing jointly):

Source: IRS
^*$768,700 for married couples filing jointly
^**$613,700 for married couples filing jointly

High-income taxpayers may also owe an additional 3.8% Net Investment Income Tax if their modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly.

To calculate your gain or loss, you need your cost basis, which is what you originally paid, including fees, commissions and other acquisition costs. You'll then compare this figure to the amount you received when you sold it. For example, buying Bitcoin for $10,000 (including fees) and selling for $15,000 results in a $5,000 capital gain.

If you sell cryptocurrency at a loss, you can use those losses to offset capital gains. If losses exceed gains, you can deduct up to $3,000 from ordinary income each year. Additional losses carry forward to future tax years.

Do You Pay Taxes on Crypto Before Withdrawal?

You generally don't pay taxes on cryptocurrency gains before withdrawal or disposal. Simply holding cryptocurrency that has increased in value doesn't trigger taxes—even if your portfolio has grown significantly.

Taxes become due when you realize gains through selling, trading or spending your crypto. You can hold Bitcoin, Ethereum or other cryptocurrencies for years without owing taxes, as long as you don't sell them.

However, if you earn cryptocurrency through mining, staking or as payment, you owe income tax on the fair market value when you receive it, regardless of whether you convert it to cash. If you later sell that earned crypto, you'll also calculate a separate capital gain or loss.

How to Report Crypto on Taxes

Reporting cryptocurrency on your tax return may involve several forms, depending on your activity:

• Form 8949: This is the primary form for reporting cryptocurrency sales and trades. You'll list each transaction, including acquisition date, sale date, cost basis, proceeds and your gain or loss. The form separates short-term transactions (held one year or less) from long-term transactions (held more than a year).
• Schedule D: This form summarizes capital gains and losses from Form 8949. After completing Form 8949, you'll transfer the totals to Schedule D.
• Schedule 1: You'll use this form to report ordinary income from cryptocurrency, such as mining, staking rewards, airdrops or crypto received as payment.
• Schedule C: This form may be necessary if your cryptocurrency activities constitute a business, such as operating a professional mining operation.
• Form 1040: This main tax form includes a question asking whether you received, sold, sent, exchanged or otherwise acquired virtual currency during the year. You must answer honestly: Saying "yes" doesn't automatically mean you owe taxes, but alerts the IRS that you had crypto activity.

Starting with the 2025 tax year (filing in 2026), crypto exchanges are required to issue Form 1099-DA to report your digital asset transactions to you and the IRS. But even if you don't receive this form, you're still responsible for accurate reporting.

What if You Don't Report Your Cryptocurrency Transactions?

Failing to report cryptocurrency transactions can lead to serious consequences. The IRS requires you to report all taxable crypto activity, even without tax forms from your exchange.

Underreporting or not reporting cryptocurrency gains can result in the following:

• Audits: The IRS has transaction data from major exchanges and uses blockchain analysis tools to identify unreported activity.
• Penalties and interest: You may face accuracy-related penalties of 20% of the underpayment, plus interest on unpaid taxes.
• Criminal prosecution: Intentional tax evasion can lead to up to five years in prison and fines up to $250,000.

If you discover mistakes on past returns, file an amended return promptly rather than wait for the IRS to reach out. This shows good faith and may reduce penalties.

Frequently Asked Questions

Plan Ahead if You're Buying and Selling Crypto

Knowing you'll need to report cryptocurrency activity on your tax return, it can help to set up a tracking system as early as possible. Third-party tools can connect multiple exchanges and wallets to consolidate your transactions in one place. You can also track everything manually, but it can get complicated quickly as your activity grows.

Also, if you're planning to sell, exchange or spend crypto, pay attention to your holding period. If you're close to the one-year mark, waiting a bit longer could qualify you for the lower long-term capital gains tax rate.