The IRS treats crypto as property, not currency, which changes how you report it

The Internal Revenue Service taxes cryptocurrency the same way it taxes stocks or real estate — as property. This means every time you sell, trade, or spend crypto, you owe tax on any gain in value. You also owe tax on crypto you receive as payment or as a reward for mining or staking. The tax is based on how much the crypto was worth when you got it versus what it was worth when you sold or used it.

This is different from how many people think about crypto. It is not taxed like a foreign currency, where you only owe tax when you convert it to dollars. Instead, the IRS watches every transaction. If you bought Bitcoin at $30,000 and sold it at $45,000, you owe tax on the $15,000 gain, even if you never convert it to dollars and even if you when ready buy a different coin.

Key Takeaways

  • Every sale, trade, or use of crypto triggers a taxable event, and you owe tax on the difference between what you paid and what it was worth when you sold or used it.
  • Crypto received as income — from mining, staking, airdrops, or payment for work — is taxed at ordinary income rates based on its value the day you received it.
  • You report crypto gains and losses on Schedule D (Form 1040) and losses can offset other capital gains or up to $3,000 of ordinary income per year.
  • Exchanges and brokers that handle over $20,000 in transactions must report your activity to the IRS on Form 1099-DA (starting in 2025) or Form 1099-B.
  • Keeping records of every transaction — the date, amount, price paid, and price received — is essential because the IRS can match your reported gains against exchange reports.

Capital gains: when you sell or trade crypto

A capital gain happens when you sell crypto for more than you paid for it. A capital loss happens when you sell for less. The IRS taxes capital gains at two rates depending on how long you held the crypto. If you held it for one year or less, it is a short-term capital gain, taxed at your ordinary income tax rate (10%, 12%, 22%, 24%, 32%, 35%, or 37%, depending on your income). If you held it for more than one year, it is a long-term capital gain, taxed at 0%, 15%, or 20%, depending on your income.

Trading one coin for another is also a taxable event. If you trade Ethereum for Bitcoin, the IRS treats it as if you sold the Ethereum for its current value in dollars, then used those dollars to buy Bitcoin. You owe tax on any gain in the Ethereum, even though you never touched dollars and even though you when ready bought something else.

Spending crypto to buy something — a coffee, a car, a service — is also taxable. If you spent Bitcoin worth $50,000 to buy a car, and you originally paid $30,000 for that Bitcoin, you owe tax on the $20,000 gain.

Income: mining, staking, airdrops, and payment

Crypto you receive as income is taxed at ordinary income rates, not capital gains rates. This includes crypto you mine, earn through staking, receive as an airdrop, or get paid in for work. The taxable amount is the fair market value of the crypto on the day you received it, not what you later sell it for.

If you mined one Bitcoin on a day when Bitcoin was worth $40,000, you owe tax on $40,000 of ordinary income that year, even if Bitcoin later drops to $30,000 and you sell it at a loss. Your cost basis — the amount you use to calculate gain or loss when you later sell — is $40,000, the value on the day you received it.

Staking rewards work the same way. If you staked Ethereum and received 0.5 ETH worth $1,500 on the day you received it, you owe tax on $1,500 of ordinary income. If you later sell that 0.5 ETH for $1,200, you have a $300 capital loss to offset other gains.

What the IRS knows about your transactions

Crypto exchanges and brokers that handle more than $20,000 in transactions must report your activity to the IRS. Starting in 2025, exchanges will use Form 1099-DA to report sales and other dispositions of digital assets. Before 2025, many used Form 1099-B (the same form used for stock sales) or did not report at all, depending on the exchange and the year.

The 1099-DA will show the IRS the date you sold, the amount you sold, and the proceeds you received. It will not automatically show your cost basis — what you originally paid — so you must keep your own records to prove it. If you bought Bitcoin for $30,000 and sold it for $45,000, the exchange reports the $45,000 to the IRS, but you have to prove you paid $30,000 so the IRS knows the gain is $15,000, not $45,000.

Not all exchanges report yet, and reporting standards vary by exchange and by country of operation. But the IRS cross-checks reported sales against tax returns. If an exchange reports a $45,000 sale and you report a $15,000 gain, the IRS will notice the difference and may send you a notice asking you to explain.

How to calculate and report gains and losses

To calculate your gain or loss on a sale, subtract your cost basis from the sale price. Your cost basis is what you paid for the crypto, including any fees. If you bought 1 Bitcoin for $30,000 plus a $100 exchange fee, your cost basis is $30,100. If you sold it for $45,000, your gain is $14,900.

You report capital gains and losses on Schedule D (Form 1040), the same form you use for stock sales. Short-term gains and losses go in Part I; long-term gains and losses go in Part II. If your losses exceed your gains, you can deduct up to $3,000 of net loss against ordinary income in that year. Any loss above $3,000 carries forward to future years.

Income from mining, staking, and airdrops goes on Schedule 1 (Form 1040) as "other income." Some people also report it on Schedule C if they are running a mining or staking business, but that is only necessary if you have significant activity and business expenses to deduct.

Record-keeping: what you need to save

The IRS does not require a specific format, but you must keep records that show the date, amount, price paid, and price received for every transaction. A spreadsheet works. Many people use crypto tax software that connects to their exchange accounts and pulls transaction history automatically, then calculates gains and losses.

If you trade frequently or use multiple exchanges, manual tracking becomes difficult fast. A single year of active trading can mean hundreds of transactions, each with its own gain or loss. Mistakes in tracking cost basis are common and are the most frequent reason the IRS adjusts crypto tax returns.

Keep records for at least three years after you file the return, though the IRS can go back longer if it suspects underreporting. If you cannot find records for a transaction, the IRS may assume your cost basis was zero, meaning your entire sale price is taxable gain.

State and local taxes on crypto

Most states that have an income tax also tax crypto gains the same way the federal government does. A few states have no income tax (including Texas, Florida, and Wyoming), so residents of those states owe federal tax but not state tax on crypto gains. Some cities also tax capital gains, though this is less common and usually applies only to high earners.

A small number of states have experimented with treating crypto differently — for example, Wyoming allows certain crypto businesses to operate with different tax treatment — but for most people in most states, state tax on crypto follows federal rules.

Frequently Asked Questions

Do I owe tax if I just hold crypto and do not sell it?

No. Holding crypto is not a taxable event. You only owe tax when you sell, trade, spend, or receive it as income. If you bought Bitcoin in 2020 and still hold it in 2024, you owe no tax on the gain, even if it is worth ten times what you paid.

What if I lost money on a crypto sale?

You can use the loss to offset capital gains from other sales. If you have no other gains, you can deduct up to $3,000 of net capital loss against ordinary income in that year. Any loss above $3,000 carries forward to future years and can offset future gains or income.

Do I owe tax on an airdrop if I did not ask for it?

Yes. The IRS treats an airdrop as income on the day you received it, based on its fair market value that day. You owe tax even if you did not ask for it and even if you when ready sold it or discarded it. The value on receipt day is your cost basis for calculating gain or loss if you later sell.

What if I use crypto to buy something but do not know the exact price that day?

You need to research the price. Use a historical price tracker like CoinMarketCap or CoinGecko, which show the price of major coins on any past date. If you cannot find an exact price, use the closest available data and keep a note of your source. The IRS expects reasonable effort; if you are audited, you can explain your method.

Can I deduct losses from crypto theft or a scam?

Theft losses are generally not deductible for individuals under current tax law. A scam or fraud loss may be deductible as a casualty loss, but only if it meets specific IRS rules and only for the tax year in which you discovered the loss. The rules are strict and the deduction is limited. Consult a tax professional if this applies to you.