Crypto tax guide

$500,000. That's how much a Reddit user claimed they owed the IRS after trading ethereum. The problem: They didn’t realize how much they owed until the following year. By then, their account had dropped from $1 million to less than $200,000, and because all the losses occurred in the following year, they couldn’t deduct any of it from their $500,000 bill.

While stories like these are scary, most of them could've been prevented with basic crypto tax education. Here, we cover the big picture so investors can avoid common crypto tax pitfalls. As always, investors should consult with a tax advisor to accurately manage their tax bill.

What’s changing in 2025 regarding crypto taxes

Effective as of January 1, 2025, digital asset brokers are now required by the IRS to issue a new tax form called the 1099-DA. This form reports gross proceeds from the sale or exchange of digital assets (i.e., bitcoin, ethereum, NFTs, and other cryptocurrencies) through brokers.

In simple terms, if an investor sold crypto through a broker in the 2025 tax year, they will receive a 1099-DA form in early 2026.

Then, effective January 1, 2026, brokers will also be required to include the cost basis for any crypto bought on their platform on or after January 1, 2026 in the 1099-DA. This applies to the 2026 tax year, and the updated 1099-DA will be distributed in early 2027.

This change may help simplify investors' gain/loss calculations. However, note that if an investor transferred any crypto assets bought on another exchange, the cost basis of those purchases don’t automatically appear on their current exchange. They’ll have to manually input them for their personal accounting purposes.

Also note that if investors have opted to use the FIFO (first in first out) disposal method for their cost bases, and they haven’t provided a cost basis for crypto transferred from another platform, brokers will use the date of the transfer to calculate FIFO.

Do investors have to pay taxes on crypto?

According to Notice 2014-21Opens in a new window, the IRS currently considers cryptocurrencies "property" rather than currencies, which means they're treated a lot like traditional investments (such as stocks). Selling at a profit triggers capital gains tax, while selling at a loss may allow investors to take deductions.

Unlike stocks, however, there are more tax nuances to consider.

Note that as of January 1, 2025, all crypto sale transactions must be reported to the IRS. Investors should consider consulting a licensed tax professional to help accurately manage their tax bill.

How is crypto taxed?

Crypto can be taxed as capital gains or ordinary income. Here are some of the most common triggers. Note that these lists are not exhaustive, and policy regarding crypto continues to evolve. Be sure to speak to a tax professional to ensure accuracy.

You may owe capital gains tax on your crypto if...

• They sold your crypto for a profit. Positions held for a year or less are taxed as short-term capital gains. Positions held for over a year are taxed at lower rates as long-term capital gains.
• They exchanged one cryptocurrency for another. If an investor traded bitcoin (BTC) for ethereum (ETH) at a profit, their taxable gain for this transaction would be the dollar amount received in ethereum minus the cost basis of their bitcoin (also known as the original purchase price).
• They bought goods or services with crypto. Assume someone agrees to sell an investor a car in exchange for bitcoin. They buy the car with an amount of bitcoin that has increased in value since their original purchase. The investor's taxable gain would be the value of their bitcoin at the time they bought the car minus the cost basis of their bitcoin.
• They sent crypto to someone else. If an investor transferred their crypto to a crypto wallet owned by somebody else, they should check with their tax advisor to determine if they may owe any tax. If a transfer incurs a transfer fee, that fee will be a reportable disposition appearing on a 1099-DA. Please consult with a tax advisor on the taxability of that activity.

Example: An investor bought $30,000 worth of ethereum (ETH), then traded them for bitcoin (BTC) with a $40,000 fair market value at the time of the trade ("fair market value" is simply how much the coins are worth at the time of the transaction). Taxable gain: $40,000 − $30,000 = $10,000. Two months later, the fair market value of their BTC has risen to $60,000, and they spend all of it on a car. Taxable gain: $60,000 − $40,000 = $20,000.

Note: if an investor's taxable income is below the minimum threshold for the year, they may qualify for a 0% rate on realized long-term capital gains.

Investors may owe income tax on your crypto if...

• Their salary was paid in crypto. This is also taxed based on the fair market value at the time they were paid.
• They received crypto from mining or staking, or as part of an airdrop or hard fork.* If an investor is self-employed and running a crypto mining business, they'll also need to pay self-employment tax to cover their Medicare and Social Security contributions. Tax treatment for these scenarios is evolving—consult with tax advisor for the best way to file.
• They sold goods or services for crypto. Their revenue is taxed based on the fair market value at the time the transaction was made. If this was a business transaction, their expenses may offset some of their revenue.
• They sold crypto that is classified as "inventory." If an investor runs a business that sells cryptocurrencies (for example, as part of a mining operation), they may trigger ordinary income tax on their sales. For more details, refer to Notice 2014-21Opens in a new window and consult a tax professional.

Example: On September 1, an investor's employer pays them $5,000 in BTC. Their taxable income on this transaction is $5,000, regardless of whether the value of BTC goes on to rise or fall in value.

You may be able to deduct crypto losses if...

• They sold their crypto for a loss. An investor may be able to offset the loss from their realized gains, and deduct up to $3,000 from their taxable income for the year if their losses exceed their gains.
• They exchanged one cryptocurrency for another at a loss. Say an investor traded BTC for ETH, but the value they received in ETH was less than the cost basis of their BTC. They may be able to deduct the loss.
• They bought goods or services with crypto at a loss. If the goods or service an investor purchased was worth less in value than the cost basis of their crypto, they may be able to deduct the loss.
• They sent crypto to someone else. If an investor transferred their crypto to a crypto wallet owned by somebody else, they should check with their tax advisor to determine potential tax implications. In general, there are no tax implications when transferring between 2 wallets they own.

Example: An investor bought BTC at a $70,000 cost basis. Two months later, the fair market value of their BTC position has dropped to $60,000. They use all of it to buy a car. Their loss on this transaction is $70,000 − $60,000 = $10,000. They may be able to offset up to $10,000 of realized capital gains, or up to $3,000 of ordinary income.

Other scenarios:

• They crypto was stolen or lost. According to current law, these are unfortunately generally not tax-deductible events.
• They bought and held crypto as a passive investor. There is likely no tax owed. The investor paid fees on their crypto purchase. They may be able to add their fees to their cost basis.
• They donated crypto. They may be able to take a deduction based on the fair market value of their crypto at the time of donation. However, note that getting a deduction for charitable donations can be difficult for individuals.

What is the crypto tax rate?

Gains from crypto transactions and crypto classified as income are taxed at the applicable rate depending on a number of factors, including investors' holding period and capital asset status.

Refer to the applicable tax tables to determine the marginal rate that applies to an investor's specific situation.

How to calculate crypto gains for taxes

An investor's brokerage platform or exchange may send a year-end statement detailing their gains and losses. If they don't, one helpful way to calculate their crypto taxes is to use tax preparation software. It's likely the software used to calculate the rest of their taxes will also support crypto calculations.

To calculate an investor's crypto taxes with tax preparation software, they'll first need the details of their crypto trade or purchase, including cost basis, time and date, and fees. If they bought or traded crypto via an exchange, they'll likely be able to access this data from their account. Most exchanges keep this information readily downloadable as a .csv file, and many tax software programs allow them to directly import a.csv.

As always, consider working with a licensed tax professional to help reduce the possibility of errors.

How investors can report cryptocurrency on their taxes

In general, they will report their crypto transactions on the following forms.

• Capital gains are reported on Schedule D (Form 1040). It's likely they'll need to complete Form 8949 first in order to complete Schedule D accurately.
• Gains classified as income are reported on Schedules C and SE if they received them as a self-employed entity.
• Gains classified as income are reported on Schedule 1 if they received them as an employee.
• As of 2025, the digital asset platform an investor uses to buy or sell crypto may provide a Form 1099-DA, which reports their cryptocurrency transactions.

Their exchange may provide a statement they can use to prepare their tax return if they bought or traded through their platform.

The list above is not exhaustive. Investors should consider consulting a licensed tax professional to help accurately manage their tax bill.

Strategies that may help reduce cryptocurrency taxes

Now that you know how crypto can be taxed, here are a few strategies that may help manage investors' tax bill:

• Hold investments for at least one year and a day before selling. Long-term capital gains are taxed at lower rates than short-term capital gains.
• Consider crypto tax-loss harvesting. That means offsetting their crypto losses against crypto gains or other capital gains to help reduce their tax bill.
• Optimize their tax lot selection. Say an investor bought 0.1 bitcoin at $50,000, another 0.1 bitcoin at $80,000, and yet another 0.1 bitcoin at $90,000. A few weeks later, they sell 0.1 bitcoin at $100,000.

Which cost basis would an investor use to calculate their capital gains? Many platforms default to First In First Out, which means the cost basis of their first purchase (in this case, the $50,000 cost basis) is automatically chosen.

However, some platforms may allow investors to choose which tax lot to sell. In this case, if they choose to use the latest purchase as their cost basis, their taxable gain would be $100,000 - $90,000 = $10,000. If they choose their earliest purchase, it would be $100,000 - $50,000 (the cost basis of your first purchase) = $50,000. Consult a tax advisor on which method may make the most sense for their taxes.

• Donate or gift their crypto. Donations could actively reduce an investor's tax bill, while gifting could help them avoid paying taxes on gains. Gifting crypto is generally not taxable unless the value of the crypto exceeds the current year's gift tax exclusion amount at the time of the gift. For example, in 2025, the annual gift tax exclusion is $19,000, so if the value of the crypto gifted is under $19,000, they likely won’t incur the gift tax.
• Remember self-employment deductions. If an investor earns crypto through a self-employed entity, don't forget about potential deductions for legitimate business expenses, including inventory, rental, utility, and even travel costs.

Not all these strategies will be appropriate for your situation, but knowing the basic crypto tax rules may help you keep more of your profits. To avoid any unexpected surprises, always know how your trade will be taxed before you execute. Always consult a tax advisor about your specific situation.

Also, in general, remember that crypto is highly volatile, and may be more susceptible to market manipulation than securities. Crypto holders don't benefit from the same regulatory protections applicable to registered securities, and the future regulatory environment for crypto is currently uncertain. Crypto is not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation, meaning you should only buy crypto with an amount you're willing to lose.

*Quick definitions: Think of mining as freelancing. You’re paid in cryptocurrency for your work. Staking is a lot like depositing money in a bank account. The interest you receive is what’s taxed. Airdrops are monetary rewards for being invested in a cryptocurrency. Hard forks happen when a cryptocurrency splits into two versions. As a holder, you typically receive airdrops of the new version.