The IRS Treats Crypto as Property
The IRS position (Notice 2014-21, confirmed repeatedly) is that cryptocurrency is property, not currency. This has major implications:
- Every sale, trade, or exchange of crypto is a taxable event
- Buying crypto with USD is not taxable — you just establish a cost basis
- Paying for goods/services with crypto is taxable (you're "selling" the crypto)
- Crypto-to-crypto trades are taxable at the moment of exchange
2026 Capital Gains Tax Rates
Short-term (held ≤12 months): Taxed as ordinary income
| Income (Single) | Rate |
|---|---|
| Up to $11,925 | 10% |
| $11,926–$48,475 | 12% |
| $48,476–$103,350 | 22% |
| $103,351–$197,300 | 24% |
| $197,301–$250,525 | 32% |
| Over $250,525 | 35–37% |
Long-term (held >12 months): Preferential rates
| Income (Single) | Rate |
|---|---|
| Up to $48,350 | 0% |
| $48,351–$533,400 | 15% |
| Over $533,400 | 20% |
High earners also pay 3.8% Net Investment Income Tax (NIIT) on long-term gains above $200,000 (single) or $250,000 (MFJ).
What Triggers a Taxable Event
| Action | Taxable? |
|---|---|
| Buy crypto with USD | ❌ No |
| Sell crypto for USD | ✅ Yes |
| Trade BTC for ETH | ✅ Yes |
| Pay for goods with crypto | ✅ Yes |
| Receive crypto as payment | ✅ Yes (ordinary income) |
| Receive staking rewards | ✅ Yes (ordinary income when received) |
| Receive mining rewards | ✅ Yes (ordinary income) |
| Receive airdrop | ✅ Yes (ordinary income when received) |
| NFT sale | ✅ Yes |
| Transfer between your own wallets | ❌ No |
| Gift crypto (under $18,000) | ❌ No (for giver) |
Calculating Cost Basis
Your taxable gain = Selling Price − Cost Basis
Cost basis methods (must choose one and be consistent):
- FIFO (First In, First Out): Oldest coins sold first — IRS default
- HIFO (Highest In, First Out): Highest-cost coins sold first — minimizes gains
- Specific Identification: Pick exact coins — requires proper record-keeping
Example: You bought 1 BTC at $30,000 in 2023 and 1 BTC at $60,000 in 2024. You sell 1 BTC today at $80,000.
- FIFO: Gain = $80,000 − $30,000 = $50,000
- HIFO: Gain = $80,000 − $60,000 = $20,000
HIFO can save thousands — but you must have proper records for each transaction.
Staking and DeFi Tax Treatment
The IRS confirmed in Revenue Ruling 2023-14 that staking rewards are ordinary income when received, valued at fair market value at time of receipt.
DeFi specifics:
- Adding liquidity to a pool: receiving LP tokens is generally not taxable
- Removing liquidity: may trigger gain/loss on LP tokens
- Yield from lending protocols: ordinary income
- Wrapped tokens (e.g., WBTC): typically not taxable if 1:1 conversion
Tax-Loss Harvesting: The Crypto Advantage
Unlike stocks, crypto is not subject to the wash-sale rule (as of 2026). This means you can:
- Sell crypto at a loss
- Immediately rebuy the same crypto
- Claim the capital loss to offset gains (up to $3,000/year against ordinary income)
Example: You have $15,000 in BTC gains (long-term, 15% rate = $2,250 tax). You also hold ETH with $12,000 unrealized loss. Harvest the ETH loss: net taxable gain = $3,000, tax = $450. Saved $1,800.
Congress has proposed closing this loophole — take advantage while it remains available.
How to Report Crypto to the IRS
- Form 8949: Report each transaction (sale, trade, etc.)
- Schedule D: Summary of all capital gains/losses
- Schedule 1 Line 8z: Staking rewards, mining income, airdrops
- FBAR / Form 8938: If you hold crypto on foreign exchanges exceeding thresholds
IRS Form 1040 now has a front-page question: "At any time during 2025, did you receive, sell, exchange, or otherwise dispose of any digital asset?" A "Yes" answer with no supporting forms is a red flag.
Use our Crypto Tax Calculator to estimate your liability.