Crypto Tax Basics: How the IRS Taxes Digital Assets

The fundamental rule

Cryptocurrency = property for federal tax purposes. Same general rules as stocks: you have a cost basis, you recognize gain or loss when you dispose of it, and the holding period determines short-term vs long-term capital gain rates.

Taxable events

• Selling crypto for USD or fiat
• Trading one crypto for another (BTC → ETH is taxable)
• Spending crypto on goods or services
• Earning crypto (mining, staking, airdrops, interest, payments for work) — ordinary income at fair market value

Non-taxable events

• Buying crypto with USD
• Holding crypto
• Transferring between your own wallets
• Gifting crypto under the annual exclusion ($18,000 in 2024)
• Donating crypto to a qualified charity (and you get a deduction)

Cost basis methods

The default is FIFO (first-in-first-out). Specific identification is allowed if you can document which lot you sold. HIFO (highest-in-first-out) often minimizes tax in a falling market but requires meticulous records. The IRS finalized regulations requiring wallet-by-wallet accounting starting 2025.

Mining, staking, and airdrops

• Mining — ordinary income at FMV on receipt; self-employment if a trade or business
• Staking rewards — ordinary income when you have 'dominion and control' (per 2023 IRS guidance)
• Airdrops/forks — ordinary income at FMV when received

The 1099-DA changes everything (2025+)

Starting 2025, US crypto brokers must issue Form 1099-DA reporting gross proceeds. Starting 2026, they report cost basis too. The era of 'who would even know' is ending — the IRS will match reported sales against returns.

Wash-sale rule (currently doesn't apply)

Because crypto is property, not a security, the wash-sale rule does NOT apply as of 2024. You can sell at a loss and immediately rebuy. Multiple bills have proposed extending the rule to crypto — it's likely to happen eventually.

The crypto question on Form 1040

Every individual return now asks: "At any time during the year, did you receive, sell, exchange, or otherwise dispose of a digital asset?" Answering No when the answer is Yes is perjury. Always answer truthfully.