Taxes When You Buy or Sell Cryptocurrency

Cryptocurrency taxation continues to be one of the most confusing areas of tax law, partly because the rules treat a novel asset class under principles designed for stocks and property. Understanding the basics — and the record-keeping required — is essential for anyone actively using or investing in crypto.

The foundational rule is that the IRS treats all cryptocurrency as property, not currency. This has several major implications: when you sell crypto for cash, you realize a capital gain or loss based on the difference between what you received and your cost basis. If you held the crypto for more than a year before selling, the gain is a long-term capital gain taxed at 0%, 15%, or 20% depending on your income. If held for a year or less, it's a short-term gain taxed at ordinary income rates — potentially much higher. Losses on crypto sales are capital losses, subject to the same $3,000 annual deduction limit against ordinary income, with excess carried forward.

Every taxable event in the crypto world requires tracking your basis and holding period: selling crypto for cash is a taxable event; trading one crypto for another (Bitcoin for Ethereum) is a taxable event — you're deemed to have sold the first coin at its fair market value on the trade date; using crypto to buy goods or services is a taxable event — the fair market value of the crypto at the time of the purchase is your proceeds. The only events that are generally not taxable are buying crypto with cash, transferring crypto between your own wallets, or receiving it as a gift (the gift itself isn't taxable to you, though you take on the original owner's basis).

Mining cryptocurrency generates ordinary income equal to the fair market value of the coins at the time you receive them — taxed just like self-employment income, subject to both income tax and self-employment tax. Staking rewards and interest from crypto lending platforms are also generally treated as ordinary income when received. Receiving crypto as payment for services is ordinary income at the fair market value on the date of receipt. Airdrops — free coins received from a blockchain project — are also typically ordinary income when received.

Record-keeping is the biggest practical challenge in crypto taxation. You need to track the date of every transaction, the amount acquired or disposed of, the fair market value in U.S. dollars at each transaction date, and the resulting gain or loss. Most crypto exchanges provide transaction history, but not all generate the tax documents you need. Many exchanges now provide 1099 forms, but these often only reflect transactions on that specific exchange, not your overall tax position across multiple wallets and platforms. Crypto tax software — which can import transactions from exchanges and wallets and calculate gains using your preferred accounting method (FIFO, HIFO, specific identification) — is often essential for anyone with more than a handful of transactions. The IRS now includes a digital assets question at the top of Form 1040, and answering it incorrectly is a red flag.