The IRS treats cryptocurrency as property, not currency, so you owe capital gains tax when you sell it for a profit

The Internal Revenue Service (IRS) classifies cryptocurrency as property. That means every time you sell crypto, trade it for another coin, or use it to buy something, you trigger a taxable event. You calculate your gain or loss by subtracting what you paid for the crypto from what you received when you sold or traded it. If you have a gain, you owe federal income tax on it. If you have a loss, you can use it to offset other gains.

The tax applies whether you made money or lost it. If you bought Bitcoin at $50,000 and sold it at $45,000, you have a $5,000 loss that you can report. If you bought at $50,000 and sold at $60,000, you owe tax on the $10,000 gain. The IRS does not care whether you held the crypto for a day or five years — the tax rate depends on how long you held it, not on whether you made money.

You do not owe tax just for holding crypto. Buying Bitcoin and letting it sit in your wallet is not a taxable event. You only owe tax when you sell, trade, or spend it.

Key Takeaways

  • Selling crypto for a profit triggers capital gains tax at either the short-term rate (your ordinary income tax rate, if you held it under one year) or the long-term rate (0%, 15%, or 20%, depending on income, if you held it one year or longer).
  • Trading one cryptocurrency for another is a taxable event, even if you do not convert to dollars.
  • Using crypto to pay for goods or services counts as a sale and triggers tax on any gain since you bought it.
  • Losses from crypto sales can offset gains from other investments or up to $3,000 of ordinary income in a single year.
  • You must report all crypto transactions to the IRS on Form 8949 and Schedule D, and the IRS receives transaction reports from major exchanges.

Short-term versus long-term capital gains rates

How long you held the crypto determines which tax rate applies. If you held it for one year or less, you pay short-term capital gains tax, which is the same as your ordinary income tax rate — anywhere from 10% to 37% depending on your total income and filing status. If you held it for more than one year, you pay long-term capital gains tax, which is lower: 0%, 15%, or 20% depending on your income bracket.

The holding period starts the day after you buy and ends the day you sell. If you bought crypto on March 15, 2023, and sold it on March 15, 2024, you held it for exactly one year and may have access to for long-term rates. If you sold on March 14, 2024, you held it for less than one year and owe short-term rates.

Long-term rates are significantly lower. A person in the 24% ordinary income bracket pays 15% long-term capital gains tax instead. Someone in the 37% bracket pays 20% instead. This is why the timing of a sale matters: selling one day after the one-year mark can save thousands in tax on a large gain.

Trading crypto for other crypto counts as a sale

Swapping Bitcoin for Ethereum, or any cryptocurrency for any other, is a taxable event. You do not have to convert to dollars for the IRS to consider it a sale. The moment you trade one coin for another, you owe tax on any gain in the coin you gave up.

To calculate the gain, you need the fair market value of the crypto you received on the day of the trade. If you traded 1 Bitcoin worth $45,000 for 20 Ethereum worth $45,000, you have no gain or loss (assuming you paid $45,000 for the Bitcoin). If you paid $30,000 for the Bitcoin, you have a $15,000 gain, even though you still own crypto and never touched dollars.

This applies to any trade: swapping on a decentralized exchange, converting stablecoins, or exchanging one altcoin for another. The only exception is moving crypto between wallets you own — that is not a taxable event because you did not sell or trade it.

Using crypto to buy goods or services creates a taxable event

Paying for a coffee, a car, or anything else with cryptocurrency counts as a sale. You owe tax on the gain between what you paid for the crypto and what it was worth on the day you spent it.

If you bought 0.5 Bitcoin at $20,000 and spent it on a laptop when Bitcoin was worth $50,000, you have a $15,000 gain. You owe capital gains tax on that $15,000, even though you received goods instead of dollars. The IRS values the transaction at the fair market value of the Bitcoin on the day of the purchase, not the price you paid for the laptop.

This rule applies whether you use a crypto debit card, pay directly from your wallet, or any other method. The moment the transaction settles, you have a taxable event.

How to report crypto transactions to the IRS

You report crypto gains and losses on Form 8949: Sales of Capital Assets, which feeds into Schedule D: Capital Gains and Losses. Both forms are part of your federal tax return.

Form 8949 requires the date you bought the crypto, the date you sold it, your cost basis (what you paid), the sale proceeds (what you received), and your gain or loss. If you have many transactions, you can attach a statement listing them all instead of filling in each line individually. Schedule D summarizes your short-term and long-term gains and losses and calculates your net gain or loss for the year.

Major crypto exchanges — including Coinbase, Kraken, and others — report transactions to the IRS on Form 1099-B if you had more than $20,000 in transactions and 200 or more transactions in a year. The IRS receives these reports and cross-checks them against your tax return. If your reported gains do not match what the exchange reported, the IRS will likely contact you.

You must report all transactions, even small ones and even if you did not receive a 1099-B. The IRS expects a complete record of every buy, sell, and trade.

Using losses to reduce your tax bill

If you sold crypto at a loss, you can use that loss to offset gains from other investments. If you have $10,000 in gains from selling stocks and $6,000 in losses from selling crypto, your net capital gain is $4,000, and you owe tax only on that amount.

If your losses exceed your gains in a year, you can deduct up to $3,000 of the excess loss against your ordinary income (wages, salary, and other non-investment income). If your losses are larger than $3,000, you carry the remaining loss forward to future years and can use it to offset future gains or deduct another $3,000 against ordinary income each year until the loss is used up.

This strategy is called tax-loss harvesting. Some people intentionally sell crypto at a loss late in the year to offset gains and reduce their tax bill. You can then buy the same crypto back when ready — there is no rule against that — but you cannot buy it back within 30 days before or after the sale if you want to claim the loss. If you do, the IRS treats it as a "wash sale" and disallows the loss.

Staking rewards and airdrops are taxable income

Earning crypto through staking, mining, or receiving an airdrop is taxable as ordinary income in the year you receive it. The IRS values it at the fair market value on the day you received it.

If you staked Ethereum and earned 0.5 ETH worth $1,000 on the day you received it, you owe income tax on $1,000. Your cost basis for that 0.5 ETH is $1,000. If you later sell it for $1,200, you have a $200 gain and owe capital gains tax on that gain as well.

This is separate from the capital gains tax you owe when you sell. You pay income tax when you receive the reward, and then capital gains tax (short-term or long-term, depending on how long you hold it) when you sell.

Frequently Asked Questions

Do I owe taxes if I bought crypto but have not sold it yet?

No. Holding crypto is not a taxable event. You only owe tax when you sell, trade, or spend it. If the value goes up or down while you hold it, that does not trigger a tax bill. You owe tax only when you realize the gain by converting it to dollars or another asset.

What if I lost my private keys and cannot access my crypto anymore?

You cannot claim a loss on crypto you cannot access. The IRS requires you to have actually sold or disposed of the asset to claim a loss. If your crypto is locked away and you cannot sell it, you have no taxable event and no loss to report. If you later recover access and sell it, you report the gain or loss at that time.

Do I have to report small transactions, like buying coffee with Bitcoin?

Yes. The IRS requires you to report all transactions, regardless of size. If you bought Bitcoin at $40,000 and spent it on a $5 coffee when Bitcoin was worth $50,000, you have a $5 gain and must report it. In practice, tracking tiny transactions is difficult, but the rule is clear: all transactions count.

What if I trade crypto on a decentralized exchange that does not report to the IRS?

You still owe tax. The IRS does not care whether an exchange reports your transactions or not. You are responsible for reporting all trades, whether they happen on Coinbase, a decentralized exchange, or a peer-to-peer swap. The IRS is increasing its focus on unreported crypto income, so reporting is important even if you think no one is watching.

Can I deduct losses from crypto if I also have gains from stocks?

Yes. Capital losses from crypto offset capital gains from any source — stocks, bonds, real estate, or other crypto. If you have $8,000 in stock gains and $5,000 in crypto losses, your net capital gain is $3,000. You can also use up to $3,000 of excess losses against ordinary income in the same year.