How Does the IRS Tax Cryptocurrency

The IRS classifies virtual currency as property under Notice 2014-21, published in 2014. This classification means every disposition — selling for USD, swapping one token for another, spending crypto on goods — triggers a taxable event. Revenue Ruling 2023-14 confirmed that staking rewards are taxable income when received. The tax question on Form 1040 now asks whether you received, sold, sent, exchanged, or otherwise acquired any digital assets during the tax year. Answering “no” when the answer is “yes” is perjury. We cross-reference all tax guidance against IRS publications as documented in our research methodology.

Last reviewed: August 31, 2026

When Do You Owe Taxes on Cryptocurrency?

You owe taxes whenever you dispose of crypto: selling for fiat, exchanging one token for another, spending crypto on purchases, or receiving crypto as income. Simply holding cryptocurrency in a wallet is not a taxable event. Transferring between your own wallets is also not taxable.

The IRS FAQ on virtual currency transactions specifies that you must recognize gain or loss on every sale or exchange. This includes trading Bitcoin for Ethereum on a centralized exchange, swapping tokens on Uniswap, and paying for a coffee with Bitcoin. Each event requires calculating the fair market value in USD at the exact time of the transaction. Buying crypto with USD is not taxable — it establishes your cost basis. Receiving crypto as a gift is not taxable at receipt (you inherit the giver’s cost basis), but selling it later triggers a capital gain. Receiving crypto for services rendered — freelancing, employment, bounties — is ordinary income, taxable at fair market value when you receive it, subject to income tax and self-employment tax where applicable.

How Are Crypto Capital Gains and Losses Calculated?

Capital gain equals the sale price minus your cost basis (what you paid for it, including fees). If you held the asset for more than one year, it qualifies for long-term capital gains rates. One year or less means short-term rates, taxed as ordinary income.

The long-term rate depends on your total taxable income. For 2026, the 0% rate applies to individuals with taxable income below approximately $48,000 (single) or $96,000 (married filing jointly). Most crypto investors fall into the 15% bracket. The 20% rate applies to high earners. Losses can offset gains dollar-for-dollar. If your losses exceed your gains, you can deduct up to $3,000 per year against ordinary income and carry excess losses forward indefinitely. This makes tax-loss harvesting a legitimate strategy — though the wash sale rule, which currently applies to securities, may be extended to crypto by future legislation.

What Cost Basis Method Should You Use?

The IRS allows two methods: specific identification and FIFO (first in, first out). FIFO is the default if you do not specifically identify which units you are selling. Specific identification gives you more control over your tax outcome.

With specific identification, you choose which exact units to sell by documenting their unique identifiers and acquisition dates. This allows you to strategically sell high-basis lots first to minimize gains, or low-basis lots in years with offsetting losses. The IRS FAQ states: “If you can specifically identify which units of virtual currency you sold,” you may use their actual cost as basis. “If you cannot make a specific identification, the units are deemed to have been sold on a first in, first out (FIFO) basis.” FIFO sells your oldest units first. In a rising market, this maximizes your gain because your oldest purchases likely have the lowest cost basis. LIFO (last in, first out) and HIFO (highest in, first out) are variants of specific identification. Most crypto tax software supports all methods. I recommend HIFO for most retail investors — it sells the highest-cost lots first, minimizing current-year gains. You must be consistent within a tax year and document your method.

How Is Crypto Staking Income Taxed?

Staking rewards are taxed as ordinary income at fair market value when you receive them, according to Revenue Ruling 2023-14. You owe income tax when the rewards hit your wallet, regardless of whether you sell them. If you later sell the rewards, you also owe capital gains tax on any price appreciation.

This creates a two-layer tax situation. Example: you receive 1 ETH in staking rewards when ETH is priced at $2,500. You report $2,500 as ordinary income. Your cost basis in that 1 ETH is $2,500. If you sell it six months later at $3,000, you owe short-term capital gains tax on the $500 gain. The ruling applies to both proof-of-stake validation rewards and delegated staking rewards. For liquid staking (Lido stETH, Rocket Pool rETH), the tax treatment is less clear — the IRS has not issued specific guidance on whether receiving stETH in exchange for ETH is a taxable event. The conservative approach: treat every receipt of new tokens as income. See our detailed Form 8949 reporting guide for step-by-step filing instructions.

How Do You Report Crypto on Form 8949?

Form 8949 lists each individual crypto transaction with the date acquired, date sold, proceeds, cost basis, and resulting gain or loss. Part I covers short-term transactions. Part II covers long-term. Totals flow to Schedule D of your Form 1040.

For each transaction, record: (a) description of property (e.g., “2.5 Bitcoin”), (b) date acquired, (c) date sold or disposed, (d) proceeds in USD, (e) cost basis in USD, and (g) gain or loss. If a broker reported your transactions on Form 1099-B and the basis was reported to the IRS, check box A. If basis was not reported, check box B. If no 1099-B was issued (common for DeFi transactions), check box C. Most centralized exchanges now issue Form 1099 variants, but DeFi protocols do not. For DeFi transactions, you are responsible for tracking your own cost basis. Crypto tax software like Koinly, CoinTracker, or TokenTax can import on-chain transaction histories and generate Form 8949 entries automatically. Even with software, verify the output — miscategorized transactions are common, especially for bridging, wrapping, and liquidity pool interactions.

What Records Do You Need to Keep for Crypto Taxes?

The IRS requires you to maintain records that document the date of acquisition, cost basis, fair market value at disposition, and the gain or loss for every transaction. Keep these records for at least three years after filing the return that reports them.

Essential records include: exchange transaction histories (download CSV exports before changing exchanges), on-chain transaction hashes, wallet addresses used, the price of each asset in USD at the time of every transaction, and any fees paid. For staking, record the date and USD value of each reward received. For DeFi, document every swap, liquidity provision, withdrawal, and bridge transaction. The IRS FAQ is explicit: “You must report income, gain, or loss from all taxable transactions involving virtual currency on your Federal income tax return for the taxable year of the transaction, regardless of the amount or whether you receive a payee statement or information return.” Penalties for failure to report include accuracy-related penalties (20% of the underpayment) and potentially fraud penalties (75%) for willful omission.

This is not financial or tax advice. Consult a qualified tax professional for guidance specific to your situation.