How Is Crypto Taxed: What Every Crypto Investor Should Know

The IRS treats crypto as property, not currency. So when you sell Bitcoin for profit or buy coffee with Ethereum, you owe taxes just like selling stocks or real estate.

Yeah, I know. It sucks.

But here's the thing - once you understand the rules, it's not that complicated. And I'm gonna break it down without the corporate speak.

Taxable Crypto Events

Let me start with what actually triggers taxes. Because holding crypto? That's not taxable.

What Gets Taxed

Selling crypto for cash - Obviously taxable. You bought at $10k, sold at $15k? That's a $5k gain.

Trading one crypto for another - Yep, taxable. Trading your Bitcoin for Ethereum counts as selling the Bitcoin.

Buying stuff with crypto - This one catches people. Buy a pizza with Bitcoin? The IRS sees it as selling your Bitcoin first.

Getting paid in crypto - If your job pays you in crypto, that's income. Same if you're freelancing.

Mining and staking rewards - The moment you receive them, they're taxable income.

Airdrops and hard forks - Free crypto isn't free from taxes. You owe based on the value when you got it.

What Doesn't Get Taxed

Buying crypto - No tax when you buy. Only when you sell.

Moving between your wallets - Transfer from Coinbase to your hardware wallet? Not taxable.

HODLing - You can hold forever without owing taxes.

Small gifts - Under $19,000 in 2025? No tax for the giver.

Calculation of Crypto Gains and Losses

Here's where people mess up. You need to know your cost basis - what you paid for the crypto.

The Basic Math

Capital Gain/Loss = Sale Price - Cost Basis

Simple, right? But tracking gets messy when you buy at different prices.

Short-Term vs Long-Term

Hold less than a year? That's short-term. Taxed like regular income.

Hold over a year? Long-term gains. Lower tax rates.

I always try to hold for over a year when possible. The tax difference is huge.

Tracking Methods

You've got options:

• FIFO (First In, First Out) - Sell your oldest crypto first
• LIFO (Last In, First Out) - Sell newest first
• HIFO (Highest In, First Out) - Sell highest cost first (minimizes taxes)
• Specific ID - Pick exactly which coins you're selling

Starting in 2025, the IRS wants you to track by wallet. Once you pick a method for a wallet, you're stuck with it.

Crypto Tax Rates

The rates depend on how long you held and your income.

Short-Term Capital Gains Rates (2025)

Same as your regular income tax:

Long-Term Capital Gains Rates (2025)

Much better rates:

NFTs are different - They're "collectibles" taxed at 28% for long-term gains. Because of course they are.

Reporting Crypto on Taxes

You can't hide from this. The IRS knows.

Forms You'll Need

Form 8949 - List every single crypto transaction. Yes, every one.

Schedule D - Summary of your gains and losses.

Schedule 1 - For mining, staking, or getting paid in crypto.

Schedule C - If crypto is your business.

Record Keeping

Track everything:

• Date of each transaction
• Amount in crypto
• Value in USD
• Transaction fees
• Which wallet/exchange

I use crypto tax software. Doing this manually is masochistic.

The New 1099 Mess

Starting 2026, every exchange sends you Form 1099-DA. Sounds helpful? It's not.

Problem is, they only know what happens on THEIR platform. Move crypto between exchanges? They think you sold it.

You'll get multiple 1099s that don't match your actual activity. Fun times ahead.

What Each Form Actually Does

Form 1099-B - Barely used for crypto. Ignore unless your broker specifically sends one.

Form 1099-K - You might get this if you received over $600 in crypto payments. Doesn't mean you owe tax on the full amount.

Form 1099-MISC - Random crypto income goes here. Referral bonuses, that kind of thing.

Form W-2 - Your employer paid you in Bitcoin? It shows up here like regular income.

The forms don't calculate your taxes. They just tell the IRS you had activity.

My Record-Keeping System

After getting wrecked trying to reconstruct 2017 trades, here's what I do now:

1. Screenshot everything - Every trade, every transfer
2. Use one spreadsheet - Date, type, amount, USD value, platform
3. Download exchange reports monthly - They love deleting old data
4. Track wallet addresses - Especially for DeFi stuff

And yeah, I finally caved and bought crypto tax software. Trying to match hundreds of transactions manually is torture.

The Digital Asset Question

That yes/no question on your tax return? Don't get cute.

Even if you just received $5 in crypto, answer "Yes."

The IRS knows more than you think. Lying on this question is straight-up perjury.

Special Crypto Transactions

Some stuff needs special attention.

Staking and Mining

When you receive staking rewards or mine coins, that's ordinary income at the moment you get them.

Then if you sell later? Capital gains on top of that.

Airdrops and Forks

Same deal. Income when received, then capital gains when sold.

Gifts and Donations

Gifting crypto - Under $19,000? No tax for you. Over that? File Form 709.

Donating to charity - No capital gains tax AND you might get a deduction. Win-win.

DeFi and NFTs

The IRS hasn't given clear guidance on DeFi. I treat lending income as ordinary income.

NFTs? If you're flipping them, that's business income. Holding and selling? Capital gains at 28%.

Tax Deductions and Losses

Good news - losses can help.

Capital Loss Deduction

Lost money on crypto? You can:

• Offset all your capital gains
• Deduct up to $3,000 against regular income
• Carry forward the rest forever

Theft and Loss

If your crypto gets stolen:

• You might claim a theft loss
• Need a police report
• Rules got stricter after 2017

Lost your keys? That's usually not deductible. The IRS doesn't care about your boating accident.

Transaction Fees

Personal trading fees? Not deductible.

Business fees? Deductible on Schedule C.

What Actually Counts as a Deductible Loss

Not all crypto losses are equal. Here's what works:

Sales losses - The easiest. Sell for less than you bought? That's deductible.

Theft losses - Got hacked? You can deduct it IF:

• You file a police report
• There's zero chance of recovery
• You only claim your cost basis (not what it was worth when stolen)

Worthless crypto - That shitcoin went to zero? Sorry, you can't deduct it until you actually sell or abandon it. And thanks to the 2017 tax law, abandonment losses aren't deductible through 2025.

Exchange bankruptcy - FTX got you? You're stuck waiting. Can't claim the loss until the bankruptcy settles or they officially say you're getting nothing.

The $3,000 Rule Nobody Explains Right

Here's how it actually works:

1. First, losses offset all your crypto gains
2. Then they offset other investment gains (stocks, etc.)
3. THEN you can deduct up to $3,000 from your regular income
4. Everything left carries forward forever

So if you lost $20,000 on crypto this year with no gains? You deduct $3,000 now and carry $17,000 to next year.

Wash Sales Don't Apply (Yet)

This is huge. With stocks, you can't sell for a loss and buy back within 30 days.

With crypto? Go nuts.

Sell your Bitcoin at a loss today, buy it back tomorrow. Still get the tax deduction.

I do this every December. Look for my biggest losers, sell them, buy them right back. Free tax deduction while keeping my position.

Transaction Fees Are Weird

Trading fees? Add them to your cost basis. Buy $1,000 of Bitcoin with a $10 fee? Your basis is $1,010.

Network fees? Not deductible unless you're a business.

Lost in a hack? Part of your theft loss claim.

IRS Tracking and Compliance

They're watching. Here's how.

How They Track You

KYC at exchanges - Every major crypto exchange reports to the IRS.

Blockchain analysis - The IRS uses Chainalysis and similar tools.

Form 1099-DA - Starting 2026, exchanges must send this for every transaction.

The Infrastructure Bill Impact

Remember that 2021 infrastructure bill? It expanded crypto reporting big time.

Now "brokers" include way more entities. And they're all reporting your trades.

Recent and Upcoming Regulatory Changes

Things keep changing. Here's what's new.

2025 Changes

Wallet-based tracking - New cost basis rules per wallet. Pick your method carefully.

Biden's proposals - More IRS funding for crypto enforcement. They're hiring.

2026 and Beyond

Form 1099-DA - Every exchange will send you and the IRS detailed transaction reports.

DeFi reporting - They're working on making DeFi platforms report too.

My Take

Look, I get why people hate crypto taxes. But here's my advice:

Track everything from day one. The headache of reconstructing years of trades isn't worth it.

And honestly? The long-term capital gains rates aren't terrible if you're patient. I've shifted to holding longer just for the tax benefits.

Also, if you're into meme coins like Pepe, remember - every trade is taxable. Even swapping one memecoin for another.

The Bottom Line

Crypto taxes aren't going away. The IRS is getting better at tracking, and penalties can be brutal - up to $100,000 and prison time for tax evasion.

But if you:

• Track your trades
• Hold for over a year when possible
• Report honestly
• Use tax software

You'll be fine. Just don't be that person who ignores it until they get an IRS letter.

And remember - this isn't tax advice. When in doubt, talk to a CPA who actually understands crypto. Most don't.