Crypto 101, Week 11: Crypto Taxes — What the IRS Actually Wants From You

Starting with the 2025 tax year, every major exchange must report your crypto sales to the IRS. The gray zone is over. Here's what you actually owe and how to calculate it.

The Foundation: Crypto Is Property

The IRS treats cryptocurrency as property — not currency, not a commodity, but property. This was established in Notice 2014-21 and hasn't changed since.

This has two major implications that govern virtually everything in crypto taxation:

Every disposal is a taxable event. When you sell crypto for dollars, swap one token for another, or use crypto to pay for goods or services, you've disposed of property. That triggers a capital gain or loss that must be reported.

Earning crypto is income. When you receive crypto through mining, staking, airdrops, employment compensation, or DeFi yields, it's taxable as ordinary income at the fair market value when you receive it.

These two rules create the entire crypto tax framework. Everything else is a variation on them. Understanding the distinction between disposal (capital gains event) and receipt (income event) is the most important concept in crypto taxation.

Starting with the 2025 tax year, every major centralized exchange is required to send Form 1099-DA to both you and the IRS. The era of crypto existing in a tax gray zone is over.

What Triggers a Tax Event (and What Doesn't)

Taxable events — you owe something:

Selling crypto for fiat (USD, EUR, etc.): capital gains tax on the profit (proceeds minus cost basis).

Trading one crypto for another: swapping ETH for SOL is treated as selling ETH and buying SOL. You owe capital gains tax on any ETH profit even though you never touched dollars. This is the most commonly missed taxable event.

Using crypto to buy goods or services: paying for a $100 item with Bitcoin you bought at $60 triggers a $40 capital gain.

Receiving staking rewards: taxed as ordinary income at fair market value when tokens become accessible to you.

Receiving airdrops: ordinary income at fair market value when you gain control.

Getting paid in crypto: treated as a paycheck — ordinary income.

Earning DeFi yields: interest and liquidity provider rewards are ordinary income when received.

Non-taxable events — no tax owed yet:

Buying crypto with fiat: you've simply acquired property. Tax occurs at disposal.

Transferring crypto between your own wallets: moving ETH from Coinbase to your hardware wallet isn't a disposal.

Holding without selling: unrealized gains are not taxed.

Donating crypto to a qualified charity: may provide a tax deduction and avoids capital gains on appreciation.

Capital Gains: Short-Term vs. Long-Term

The tax rate on your crypto gains depends on how long you held the asset before disposing of it.

Short-term capital gains apply to assets held for one year or less. Taxed at your ordinary income rate — 10% to 37% depending on total taxable income.

Long-term capital gains apply to assets held for more than one year. Taxed at preferential rates: 0%, 15%, or 20% depending on income. High earners may also face an additional 3.8% Net Investment Income Tax (NIIT).

The practical implication: if you're planning to sell crypto at a profit, holding for at least one year and one day can significantly reduce your tax bill. The difference between short-term (up to 37%) and long-term (typically 15%) rates on a $50,000 gain could exceed $10,000 in tax savings.

Example: you buy 1 BTC for $20,000 in March 2025 and sell for $80,000 in June 2026. Holding period exceeds one year, so the $60,000 gain is taxed at long-term rates — likely 15%, or $9,000. If you'd sold in December 2025 (under one year), the same gain could be taxed at 22–37%, meaning $13,200–$22,200. The holding period decision is worth calculating before selling.

See /blog/crypto-101-portfolio-basics for how holding period decisions interact with portfolio rebalancing strategy.

Calculating Cost Basis and Accounting Methods

For every crypto disposal, you need four pieces of information: date acquired, cost basis (what you paid, including fees), date sold, and proceeds. Your gain or loss = proceeds minus cost basis.

The complication: if you bought Bitcoin at different times and prices, which Bitcoin did you sell? The IRS requires you to identify specific units using an accounting method:

FIFO (First In, First Out): assumes you sold the oldest units first. Default method if you don't specify otherwise. Not always tax-optimal.

HIFO (Highest In, First Out): assumes you sold the most expensive units first. Minimizes taxable gain in a rising market — generally favorable. Requires documentation to use.

Specific Identification: you designate exactly which units you're selling. Maximum control over tax outcomes but requires meticulous record-keeping per transaction.

Starting with 2026 transactions, the IRS requires wallet-by-wallet basis tracking — cost basis must be tracked separately for each wallet or exchange account, not aggregated. This significantly increases complexity and makes crypto tax software essentially mandatory for active participants. Tools like CoinLedger, Koinly, and CoinTracker automate this tracking.

Staking, DeFi, and The New Form 1099-DA

Staking and DeFi add an income tax layer on top of capital gains:

Step 1 — Income recognition: staking rewards are taxed as ordinary income at fair market value on the date you gain "dominion and control" — when you can freely use, sell, or transfer the tokens. If you earn 0.5 ETH in rewards when ETH is $2,000, you owe income tax on $1,000.

Step 2 — Cost basis established: that $1,000 becomes your cost basis for the received ETH.

Step 3 — Capital gains on disposal: when you later sell that ETH, you pay capital gains on the difference between your sale price and the $1,000 basis.

Form 1099-DA (Digital Asset Proceeds from Broker Transactions): for 2025 tax year transactions, exchanges report gross proceeds to both you and the IRS. Starting with 2026 transactions, exchanges will also report cost basis. This is the same reporting infrastructure as stocks. If your return doesn't match what exchanges reported, expect an IRS notice.

What Form 1099-DA doesn't cover: DeFi transactions, self-custody wallet activity, yield farming rewards, NFT trades, and cross-chain transactions. These are your responsibility to track regardless of whether a 1099 is generated. The IRS has contracts with blockchain analytics firms like Chainalysis — on-chain activity is not invisible.

For the tax implications of specific DeFi strategies, see /blog/crypto-101-defi-explained.

Tax-Loss Harvesting and Common Mistakes

Tax-loss harvesting — selling crypto at a loss to offset capital gains from other transactions — is one of the most valuable strategies available. If losses exceed gains, you can deduct up to $3,000 per year against ordinary income, with remaining losses carrying forward.

The crypto advantage: as of 2026, the traditional "wash sale" rule — which prohibits selling a security at a loss and repurchasing within 30 days — does not yet apply to cryptocurrency. You can sell Bitcoin at a loss, immediately repurchase it, and still claim the loss deduction. This loophole is widely expected to close but remains available for the current tax year.

Example: you hold ETH purchased at $3,500 now worth $2,000. You sell, realizing a $1,500 loss. You also had a $5,000 BTC gain earlier in the year. The $1,500 loss offsets part of your BTC gain, reducing taxable gain to $3,500. You can immediately repurchase ETH if you want to maintain the position.

Common mistakes that trigger audits:

Not reporting at all: the IRS cross-references 1099-DA data with your return.

Forgetting crypto-to-crypto trades are taxable: this is the most common mistake.

Ignoring staking and DeFi income: just because no 1099 was generated doesn't mean the income is invisible.

Not reporting losses: losses offset gains. Missing them means overpaying.

Frequently Asked Questions