Cryptocurrency Taxation: How the IRS Taxes Digital Assets

IRS Treats Crypto as Property: Notice 2014-21

The foundational document for US cryptocurrency taxation is IRS Notice 2014-21, published in March 2014. In this guidance, the IRS announced that virtual currency is treated as propertyfor federal tax purposes — not as currency, despite its name. This single classification has sweeping implications for how every crypto transaction is taxed.

Because crypto is property and not currency, the general tax principles applicable to property transactions apply to cryptocurrency. Every time you dispose of cryptocurrency — by selling, trading, or spending it — you must calculate your gain or loss just as you would for shares of stock. The IRS subsequently issued Revenue Ruling 2019-24, which addressed the tax treatment of hard forks and airdrops, and has updated Form 1040 to include a prominent question about digital asset transactions that every taxpayer must answer.

The IRS formally expanded its terminology from “virtual currency” to “digital assets” in 2022, broadening the scope to include non-fungible tokens (NFTs) and other blockchain-based assets. For tax purposes, the property classification means:

• Your gain or loss is calculated as the difference between the fair market value at the time of disposal and your cost basis (what you paid for it).
• The holding period (short-term vs. long-term) matters, just as it does for stocks.
• Every taxable transaction must be reported individually, even small purchases of goods with crypto.
• Tracking cost basis across potentially thousands of micro-transactions is your responsibility.

The property classification is the source of much of crypto taxation's complexity — and underscores why meticulous record-keeping is essential for any active crypto participant.

Capital Gains on Crypto: Same Rates as Stocks

Because the IRS treats cryptocurrency as property, the capital gains tax framework that applies to stocks and other investment assets also applies to crypto. The same two categories — short-term and long-term — determine the rate you pay.

Short-Term Capital Gains (Held 1 Year or Less)

If you sell, trade, or spend cryptocurrency that you acquired one year ago or less, the resulting gain is short-termand taxed as ordinary income at your marginal federal rate — anywhere from 10% to 37% depending on your total taxable income and filing status for 2025. This is the same rate that applies to wages and salaries, and it can significantly increase your tax bill if you are an active trader frequently turning over positions.

Long-Term Capital Gains (Held More Than 1 Year)

If you hold a cryptocurrency for more than one year before disposing of it, any gain qualifies for the preferential long-term capital gains rates of 0%, 15%, or 20% depending on your total taxable income. The same income thresholds that apply to stock gains apply to crypto gains. For a detailed look at these brackets, see our article on Capital Gains Tax on Stocks.

Additionally, the 3.8% Net Investment Income Tax (NIIT) may apply to capital gains from cryptocurrency sales for taxpayers with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly), further increasing the effective rate to a maximum of 23.8% on long-term gains for high-income investors.

Taxable Events

A taxable event is a transaction or occurrence that creates a tax obligation under IRS rules. For cryptocurrency, the following are generally taxable events:

Selling Cryptocurrency for US Dollars (or Other Fiat Currency)

Converting crypto to fiat currency is the most straightforward taxable event. Your gain or loss equals your proceeds minus your cost basis. The holding period determines whether it is short-term or long-term.

Exchanging One Cryptocurrency for Another

Trading Bitcoin for Ethereum, or any coin for any other coin, is a disposal of the first asset and an acquisition of the second. You must recognize any gain or loss on the crypto you gave up, using its fair market value at the time of the exchange. The fair market value of what you received becomes your new cost basis in the second asset.

Using Cryptocurrency to Pay for Goods or Services

Spending cryptocurrency to buy a product or service is a taxable disposal. You must calculate the gain or loss based on the fair market value of the goods or services received (which equals the fair market value of the crypto at the time of the transaction) versus your cost basis in the crypto spent. A cup of coffee purchased with Bitcoin is, technically, a taxable transaction — one reason why crypto is rarely used as a day-to-day payment currency in practice despite its design.

Receiving Crypto as Payment for Work or Services

If you receive cryptocurrency as compensation for work — whether as an employee or as an independent contractor — the fair market value of the crypto at the time of receipt is included in your gross income as ordinary income (and subject to self-employment tax if you are an independent contractor). This FMV also becomes your cost basis in the crypto going forward.

Non-Taxable Events

Not every action involving cryptocurrency triggers a taxable event. The following are generally not taxable under current IRS guidance:

• Transferring crypto between your own wallets: Moving cryptocurrency from one wallet you control to another — for example, from a Coinbase account to a Ledger hardware wallet — is not a taxable event. There is no change in ownership; you are simply moving your own property. Your cost basis and holding period carry over unchanged.
• Buying crypto with USD (or fiat): Purchasing cryptocurrency with US dollars is not itself a taxable event. You have simply exchanged one type of property (dollars) for another (crypto). The purchase price establishes your cost basis.
• Gifting crypto under the annual exclusion: Gifting cryptocurrency to another person is generally not a taxable income event for the donor (no gain is recognized at the time of the gift) as long as the gift amount does not exceed the annual gift tax exclusion ($19,000 per recipient for 2025). The recipient takes the donor's cost basis. Gifts above the annual exclusion require Form 709 reporting.
• Donating crypto to a qualified charity:Donating cryptocurrency to a qualified 501(c)(3) organization is generally not a taxable event for the donor. The donor may be eligible for a charitable deduction for the fair market value of the crypto donated (subject to AGI limits) and avoids capital gains tax on any appreciation — similar to donating appreciated stock.
• Holding crypto (no disposal): Simply holding crypto in a wallet, even as it appreciates dramatically in value, does not create a taxable event. Unrealized gains are not taxed under current US law.

Mining and Staking Income

Mining Income

When you successfully mine cryptocurrency — that is, when you use computing power to validate transactions and earn newly created coins as a reward — the IRS treats the fair market value of the mined crypto on the date of receipt as ordinary income. This is income in the year you receive the block reward, regardless of whether you sell the coins.

If you mine as a business (a regular activity undertaken for profit), the income is also subject to self-employment tax (15.3% on the first $176,100 of net self-employment income for 2025, 2.9% above that). Business miners may be able to deduct expenses such as electricity, hardware depreciation, and internet costs. If mining is an occasional hobby, different rules may apply; hobby loss rules limit deductibility of related expenses.

After the mining income is recognized, the mined coins have a cost basis equal to the FMV at the time of receipt. Any subsequent appreciation or depreciation when you eventually sell is then treated as a capital gain or loss.

Staking Income

Staking involves holding and locking cryptocurrency in a proof-of-stake network to help validate transactions, in exchange for additional coins as rewards. The IRS's general position, reinforced in a 2023 Chief Counsel Advice (CCA 202302011), is that staking rewards constitute ordinary income taxable at the FMV on the date the rewards are received and the taxpayer has dominion and control over them.

As with mining, the FMV of staking rewards at the time of receipt becomes the cost basis of those coins for purposes of calculating future capital gains when you sell.

Airdrops: Ordinary Income at Fair Market Value

An airdropoccurs when a blockchain project distributes free tokens to wallet addresses — often as a marketing promotion, a reward for early users, or in connection with a hard fork. Under Revenue Ruling 2019-24, the IRS addressed the taxation of airdrops resulting from hard forks and provided the following framework:

• If you receive an airdrop and you have dominion and control over the new cryptocurrency (meaning you can actually access, sell, or transfer it), the fair market value of those tokens on the date of receipt is included in your gross income as ordinary income.
• The FMV at time of receipt establishes your cost basis in the airdropped tokens.
• If a token is received but has no readily ascertainable fair market value (for example, a brand-new token with no trading market yet), the income recognition question is less clear — this is an area of ongoing regulatory uncertainty.

A common misconception is that unsolicited airdrops — tokens sent to your wallet without any action on your part — are not taxable. The IRS's current guidance does not draw a clear distinction based on whether you actively claimed the airdrop or merely received it. If you have dominion and control, the IRS position is that income has been realized.

Some “spam” airdrop tokens (tokens sent to wallets with no value or liquidity) may be difficult to value or may have zero or nominal fair market value. Document your reasoning if you conclude a token has no ascertainable FMV. This remains an area of significant practical and legal uncertainty.

DeFi Yield and Liquidity Pools

Decentralized Finance (DeFi) encompasses a broad range of blockchain-based financial protocols including lending platforms, liquidity pools, yield farming, and automated market makers. The IRS has not issued comprehensive guidance specifically covering all DeFi activities, making this one of the most uncertain areas of crypto tax law.

Yield and Interest from DeFi Lending

When you deposit cryptocurrency into a DeFi lending protocol (such as Aave or Compound) and earn interest or yield tokens in return, the general IRS position is that tokens received as yield represent ordinary income at their fair market value on the date of receipt. Each periodic yield payment is a separate income recognition event.

Liquidity Pool Deposits and Withdrawals

Providing liquidity to a decentralized exchange (DEX) by depositing a pair of tokens into a liquidity pool in exchange for LP tokens (liquidity provider tokens) is an area of particular ambiguity. Some tax professionals argue this represents a taxable exchange (disposing of the underlying tokens for LP tokens); others argue it is more analogous to a non-taxable deposit. The IRS has not issued explicit guidance on this specific structure.

When LP tokens are redeemed and the underlying tokens are returned (with or without impermanent loss), there is likely a taxable exchange event. Any appreciation or depreciation relative to the original deposit is likely subject to capital gains treatment.

Yield Farming and Token Rewards

Yield farming typically involves supplying assets to DeFi protocols in exchange for governance tokens or other reward tokens. These rewards are generally treated as ordinary income at FMV on receipt, consistent with the treatment of staking and mining rewards. The rewards then have a cost basis equal to that FMV, and any later sale is a separate capital gains event.

NFTs: Potential Collectible Tax Rate?

Non-fungible tokens (NFTs) are unique digital assets recorded on a blockchain — they can represent digital art, music, video clips, gaming items, sports memorabilia, and more. The IRS treats NFTs as property, and gains from selling NFTs you purchased are subject to capital gains tax using the same framework as other digital assets.

However, there is an important additional consideration: whether certain NFTs are subject to the 28% collectibles tax rate that applies to gains from selling coins, gems, stamps, antiques, works of art, and other collectibles under IRC Section 1(h)(4) and Section 408(m).

In Notice 2023-27, the IRS stated that it was considering whether certain NFTs constitute collectibles under the tax code and solicited public comments. The IRS indicated it would apply a “look-through analysis” — meaning it would look at what the NFT represents, not just the token itself, to determine whether it qualifies as a collectible. An NFT that represents a work of art, for example, might be a collectible; one representing a domain name might not. As of 2025, the IRS has not issued final guidance on this point.

Creators who mint and sell NFTs as a business are generally taxed on the proceeds as ordinary self-employment income, not as capital gains. Royalties received by original creators from secondary sales of their NFTs are also generally ordinary income.

Cost Basis Tracking Challenges

For stock investors, brokers are required to track and report cost basis for covered securities. For crypto investors — at least historically — tracking cost basis has been largely the taxpayer's own responsibility, and the complexity can be immense.

Specific challenges include:

• Multiple exchanges and wallets: A single investor may hold crypto across multiple centralized exchanges, decentralized wallets, hardware wallets, and DeFi protocols. Each platform maintains its own records, and aggregating them requires significant effort.
• High transaction volume: Active traders may execute hundreds or thousands of taxable transactions per year, including micro-transactions such as gas fee payments and token swaps.
• Exchange closures and incomplete records: Several major exchanges have failed or ceased operations, leaving customers without complete transaction histories.
• Cost basis methods:The IRS permits several cost basis accounting methods for cryptocurrency, including FIFO (First In, First Out), LIFO (Last In, First Out), HIFO (Highest In, First Out), and specific identification of particular lots. The method you choose can significantly affect your tax liability. FIFO is the IRS default if no method is specified. HIFO — selling the highest-cost lots first — generally minimizes gains but requires specific identification records.
• DeFi complexity: Many DeFi transactions do not generate clear transaction records and may require manual reconstruction using blockchain explorers.

Specialized cryptocurrency tax software (such as Koinly, CoinTracker, TaxBit, or similar tools) can import data from exchanges via API and help calculate gains, losses, and income across multiple platforms. However, these tools are only as accurate as the data they receive, and manual review is often necessary for complex situations. See our Investment & Tax Glossary for definitions of cost basis terms.

Wash Sale Rule and Crypto: Currently Not Applicable

The wash sale rule under IRC Section 1091 is one of the most important tax rules for stock investors. It disallows a capital loss deduction if you sell a security at a loss and then repurchase the same or a substantially identical security within the 61-day window surrounding the sale (30 days before or 30 days after). To learn more about how the wash sale rule works for stocks, see our article on the Wash Sale Rule.

As of the 2025 tax year, the wash sale rule does not apply to cryptocurrency. Because the IRS classifies crypto as property rather than a security, IRC Section 1091 — which applies to stocks and securities — does not reach digital assets under current law. This creates a notable planning opportunity for crypto investors:

Form 8949 Reporting

Just like stock sales, cryptocurrency disposals are reported on IRS Form 8949 (Sales and Other Dispositions of Capital Assets) and the results flow to Schedule D (Capital Gains and Losses) on your Form 1040.

On Form 8949, each separate taxable crypto transaction must be reported individually (or in aggregate if all transactions qualify for certain exemptions), including:

• Description of the asset (e.g., “1.5 BTC”)
• Date acquired
• Date sold or disposed of
• Proceeds (fair market value at disposal)
• Cost basis
• Gain or loss
• Short-term or long-term classification

Crypto transactions are separated into three categories based on whether cost basis was reported to the IRS by the broker (Box A transactions), not reported to the IRS (Box B or C), or whether the information was provided on a 1099-B without basis (Box E or F). Many historical crypto transactions fall into the unreported-basis category, placing the full burden of basis documentation on the taxpayer.

Since the 2019 tax year, Form 1040 has included a question asking whether the taxpayer received, sold, exchanged, or otherwise disposed of any digital assets at any point during the year. All taxpayers — not just those with significant crypto activity — must answer this question. Failing to report digital asset activity or answering incorrectly can expose taxpayers to penalties.

Ordinary income from mining, staking, or airdrops is reported on Schedule 1 (Additional Income and Adjustments) of Form 1040, not on Form 8949.

1099-DA: New Broker Reporting for Digital Assets

The Infrastructure Investment and Jobs Act of 2021 significantly expanded the definition of “broker” for tax reporting purposes to include digital asset brokers — meaning cryptocurrency exchanges and other platforms. This triggered a requirement for these brokers to report digital asset transactions to the IRS and to customers on a new form: Form 1099-DA (Digital Asset Proceeds from Broker Transactions).

The IRS finalized regulations for 1099-DA reporting in 2024. The rollout is being phased in:

• Starting with the 2025 tax year (forms issued in early 2026), centralized cryptocurrency exchanges and custodial brokers began reporting gross proceeds from digital asset sales on 1099-DA forms.
• Cost basis reporting is being phased in separately and is expected to apply beginning with the 2026 tax year for covered digital assets acquired on or after January 1, 2026.
• Decentralized exchanges (DEXs), DeFi protocols, and non-custodial wallets face separate proposed rules under ongoing IRS rulemaking; the scope and timing of those rules remain subject to significant regulatory uncertainty and potential legal challenge as of 2025.

International Reporting: FATCA and FBAR

US taxpayers who hold cryptocurrency on foreign exchanges or in overseas accounts may have additional international reporting obligations beyond their standard income tax return.

FBAR (FinCEN Report 114)

US persons with a financial interest in or signature authority over foreign financial accounts with an aggregate value exceeding $10,000 at any point during the calendar year must file a Report of Foreign Bank and Financial Accounts (FBAR) with the Financial Crimes Enforcement Network (FinCEN). The FBAR is filed electronically through the BSA E-Filing System by April 15 (with an automatic extension to October 15).

Historically, it was unclear whether cryptocurrency held on foreign exchanges was subject to FBAR reporting. FinCEN proposed rules in 2020 to clarify that virtual currency accounts held at foreign financial institutions would be reportable, but as of 2025 those proposed rules have not been finalized. This remains an area of regulatory uncertainty. Until further guidance is issued, taxpayers with significant crypto on foreign platforms should consult a qualified international tax professional.

FATCA (Form 8938)

The Foreign Account Tax Compliance Act (FATCA) requires US taxpayers who hold specified foreign financial assets above certain thresholds to report those assets on Form 8938 (Statement of Specified Foreign Financial Assets), filed with their annual income tax return. Thresholds vary by filing status and residency: for a single filer residing in the US, reporting is required if the total value of specified foreign assets exceeds $50,000 at year-end or $75,000 at any point during the year.

Whether cryptocurrency held on foreign exchanges constitutes a “specified foreign financial asset” under FATCA is another area of regulatory ambiguity that has not been definitively resolved by the IRS or Treasury as of 2025.

Penalties for non-compliancewith FBAR and FATCA can be severe — potentially $10,000 or more per violation, with criminal penalties in willful cases. US taxpayers who hold cryptocurrency on non-US platforms should seek specialized international tax advice rather than relying on general crypto tax guidance.

Frequently Asked Questions