Cryptocurrency has changed the way we invest, transact, and earn. As a result, it presents unique challenges when it comes to taxation. The IRS views cryptocurrency as property, meaning it’s treated more like real estate or stocks than traditional money. Even though it offers exciting opportunities for financial growth, knowledge of crypto taxation is essential to avoid penalties and optimize your financial strategy.
Key takeaways:
- Taxable events include selling, trading, spending, and earning crypto.
- Short-term gains are taxed at higher income tax rates; long-term gains are taxed more favorably.
- Income from crypto (e.g., from work, mining, and staking) is taxed as ordinary income.
- Reporting is required, even if no tax forms (like 1099s) are received.
- Good records are essential for compliance and tax savings.
How is crypto taxed?
If you’ve sold crypto, traded coins, or received digital assets as payment, you’ve likely triggered a tax event A specific action that creates a potential profit or income, which the IRS expects you to report and possibly pay taxes on. .
Capital gains: The impact of your holding period
Your holding period — whether short-term or long-term — affects how much you owe.
- Short-term capital gains Profits from assets held for one year or less are taxed at ordinary income rates (10% to 37%) and often apply to traders and frequent sellers.
- Long-term capital gains Profits from assets held for over one year are taxed at reduced rates (0%, 15%, or 20%) and encourage long-term investing to lower your tax bill.
Cryptocurrency as income
Crypto earned through services or rewards is treated as ordinary income. This differs from capital gains, which are generally taxed at lower rates than ordinary income. Cryptocurrency is taxed as income because it represents a form of value that can be earned, traded, or spent, similar to cash or property.
Here are some examples of crypto income-producing activity:
- Being paid in crypto for freelance work
- Staking rewards or mining payouts
- Interest earned from DeFi platforms
- Airdropped tokens or bonus rewards
These are considered compensation and, therefore, subject to income tax. The IRS treats these transactions as taxable events because they increase the recipient’s wealth.
State-level taxation
While federal cryptocurrency taxes apply nationwide, each state handles crypto differently. Some states impose income taxes on gains, whereas others with zero personal income tax are considered “crypto havens.” Since most states conform to the federal definition of gross income, activities like mining or receiving crypto as payment may be fully taxable at the state level even if no crypto is sold.
While states like New York have fairly strict oversight, the states listed below currently have crypto-friendly laws as it relates to income tax.
Crypto-friendly states (no income tax) | States with progressive crypto policies |
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Crypto held abroad: International reporting rules
Crypto assets held abroad are subject to the same scrutiny as domestic financial accounts, so US taxpayers must report overseas cryptocurrency holdings if they use foreign exchanges or wallets. Cryptocurrency taxes also extend to international activity, and penalties for non-reporting, such as failing to file the FBAR or FATCA forms, can include substantial fines or even criminal charges.
Even if no fiat currency is involved, foreign crypto accounts may still require disclosure, especially if the value exceeds certain thresholds. Here are the required IRS filings for certain holders of cryptocurrency:
- FBAR: Report accounts exceeding $10,000 (FinCEN 114)
- FATCA: Disclose foreign assets using Form 8938
New for 2025
As cryptocurrency adoption grows, so does the effort to regulate and tax it more tightly. New legislation is expanding how crypto is taxed, including more detailed reporting and tighter definitions of who qualifies as a broker. Staying updated helps you avoid surprises and adapt your tax strategies.
Introduction of IRS Form 1099-DA for crypto transactions
As of January 1, 2025, US-based cryptocurrency exchanges and brokers must report users’ digital asset sales and exchanges to the IRS using the new Form 1099-DA. This move brings crypto tax reporting in line with traditional reporting methods and aims to increase compliance and transparency.
Key details about Form 1099-DA:
- Who files it: US-based crypto brokers and exchanges
- What it reports: Gross proceeds from sales or exchanges of digital assets
- Purpose: Aligns crypto reporting with stocks and securities
- Impact: Makes it easier for the IRS to track taxable crypto activity and for taxpayers to prepare accurate returns
This change is part of a broader effort to close the tax gap and regulate the rapidly growing digital asset space.
Mandatory wallet-specific cost basis reporting
Taxpayers are now required to report the cost basis of cryptocurrency sales based on the specific wallet or account where the assets were held. The previously accepted universal wallet method is no longer permitted, making detailed recordkeeping more important than ever.
To comply with this rule, taxpayers should
This wallet-specific tracking helps the IRS ensure proper capital gain calculations and minimizes the risk of underreported income.
Repeal of expanded IRS broker rule for DeFi platforms
In April 2025, the IRS rule aiming to classify decentralized cryptocurrency exchanges (DeFi) as brokers was nullified. The original rule would have imposed tax reporting requirements on DeFi platforms similar to those required of centralized exchanges.
With this repeal,
- DeFi platforms are no longer required to issue tax forms like Form 1099-DA.
- Users remain responsible for reporting their own taxable events, such as sales, swaps, and income from staking or liquidity pools.
- The repeal marks a shift away from imposing traditional broker rules on decentralized protocols.
Safe harbor provisions for cost basis allocation
The IRS has introduced safe harbor provisions to help taxpayers allocate the cost basis of digital assets held as of January 1, 2025. These rules provide flexibility in how historical crypto holdings are reported but also come with important conditions.
Key points include the following:
- Taxpayers may choose between
- Specific unit allocation, which assigns a cost basis to individual coins/tokens.
- Global allocation, which uses an average cost across all identical assets.
- Once a method is selected, the choice is irrevocable.
- The goal is to assist taxpayers accurately calculate and report gains or losses on future transactions.
NFTs and DeFi: Special considerations
NFTs and DeFi introduce new tax complexities, especially since IRS guidance is still evolving. However, existing laws around property and income still apply to these assets.
NFT tax rules
NFTs introduce unique tax challenges due to their creative and transactional nature. Whether you’re minting, trading, or collecting, the IRS may treat these activities differently based on how you’re involved.
- Creators: Pay income + self-employment tax
- Buyers/Sellers: Capital gains on resales
DeFi tax rules
DeFi platforms allow users to earn rewards, trade tokens, and participate in liquidity pools without traditional intermediaries — but these actions still come with tax responsibilities. The IRS treats most DeFi earnings as either ordinary income or capital gains, depending on the nature of the transaction.
Here are some examples of DeFi tax treatment:
- Interest/yield rewards: Ordinary income
- Liquidity pool activity: Capital gains or losses
- Token swaps: Always considered taxable events
Real-world tax scenarios
Understanding cryptocurrency taxes becomes easier with real-life examples. These short samples highlight how crypto is taxed across various situations.
Case 1: Long-term investment gain
- Scenario: Sarah bought 2 Bitcoin (BTC) in January 2016 for $500 each and sold them in March 2025 for $80,000 each.
- Tax impact: She held the crypto for over a year, so her $79,000 gain is taxed at the long-term capital gains rate (15%).
Case 2: High-frequency trading
- Scenario: Mark bought and sold Ethereum (ETH) dozens of times throughout 2025, each time holding the asset for less than a month.
- Tax impact: All gains are considered short-term and taxed at Mark’s regular income rate (32%).
Case 3: Freelance income
- Scenario: Linda received 0.1 BTC as payment for a project when Bitcoin was worth $20,000.
- Tax impact: She reports $2,000 in ordinary income, and if she later sells the BTC, the difference is treated as a capital gain or loss.
Case 4: Offshore exchange use
- Scenario: Tom trades using a Japanese exchange, and his crypto holdings exceeded $15,000 during the year.
- Tax impact: He must file FBAR and possibly IRS Form 8938, depending on Tom’s total holdings. Noncompliance could result in fines, even if he paid US taxes.
Case 5: Bear market loss recovery
- Scenario: Rachel had $5,000 in Bitcoin gains but lost $7,000 in other altcoins.
- Tax impact: She offsets the $5,000 gain completely and applies the extra $2,000 loss to reduce her ordinary income. The amount of loss permitted to reduce ordinary income is limited to $3,000 under current law, and any remainder is carried forward to the next year.
Smart tax planning strategies
Proactive strategies like the following can significantly lower your overall tax liability:
Losses on underperforming coins may offset gains or even ordinary income, while long-term holding shifts your assets into more favorable capital gains brackets.
Strategic planning also involves choosing the right wallets and platforms for recordkeeping, especially those that provide detailed tax reports. Additionally, understanding the timing of taxable events — such as trades, conversions, or staking rewards — can help you better anticipate and manage your tax exposure.
What you must report to the IRS
Most people are surprised to learn that every crypto transaction must be reported, even if a tax form isn’t provided. The IRS now requires crypto activity to be disclosed on your annual tax return.
Even small or seemingly insignificant transactions, like using crypto for a cup of coffee, are technically reportable. This makes accurate recordkeeping more important than ever, and tools that support specific identification accounting methods (like FIFO or LIFO) can help ensure precision when calculating taxable gains.
What to track:
- Purchase and sale dates
- Prices (cost basis and sale value)
- Type of transaction (sale, income, trade)
- Fair market value at time of receipt
Frequently asked questions (FAQs)
No, receiving crypto as a gift is not taxable, but you may owe capital gains tax if you later sell it.
Yes, stablecoin-to-stablecoin swaps are taxable events treated as crypto trades by the IRS.
Yes, fees related to buying or selling crypto can be added to the cost basis or subtracted from proceeds.
No, transactions on DEXs are still taxable and must be reported, even if no Form 1099 is issued.
