Basics of Taxation for Cryptocurrency Transactions

What Are the Basics of Taxation for Cryptocurrency Transactions?

Cryptocurrency transactions are generally taxed under the same federal rules that apply to other property transactions. The Internal Revenue Service treats virtual currency as property (IRS Notice 2014-21), which means you may have to report capital gains or losses when you sell, exchange, or otherwise dispose of crypto. Some crypto-related activities—mining, staking rewards, airdrops, and payments received for goods or services—can generate ordinary income at the time you receive the asset (IRS: Understanding Virtual Currencies: https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies).

Below is a practical, up-to-date guide to help you understand what creates a taxable event, how basis and holding period work, reporting requirements, recordkeeping best practices, and common pitfalls. Always consult a tax professional for advice tailored to your situation.

Key taxable events and how they’re treated

• Selling crypto for fiat (e.g., USD): A taxable event. Gain or loss = proceeds minus your cost basis. Report on Form 8949 and Schedule D of Form 1040 (see also our guide to reporting sales: “Tax Consequences of Selling Cryptocurrency: Reporting and Records” https://finhelp.io/glossary/tax-consequences-of-selling-cryptocurrency-reporting-and-records/).

• Trading one cryptocurrency for another (e.g., BTC → ETH): Taxable event. The fair market value (FMV) of the crypto received at the time of exchange becomes the proceeds from the crypto you disposed of.

• Using crypto to buy goods or services: Taxable event. The FMV of the crypto used is treated as proceeds; your gain/loss equals FMV minus basis.

• Receiving crypto as payment for goods or services: Report as ordinary income equal to the FMV at receipt. The basis for future sales will be that FMV.

• Mining, staking rewards, forks and some airdrops: Typically taxable as ordinary income when received or when you have dominion and control, per IRS guidance (see “How to Report Cryptocurrency Forks and Airdrops on Your Tax Return” https://finhelp.io/glossary/how-to-report-cryptocurrency-forks-and-airdrops-on-your-tax-return/).

• Gifts and inheritances: Different rules apply. Gifts generally transfer basis from donor to recipient unless specific rules apply; inherited crypto takes a stepped-up basis to the FMV at date of death in most cases.

Basis, holding period, and calculating gains

• Cost basis = what you paid for the crypto, including fees. If you received crypto as income, basis is the FMV when you received it.

• Holding period: If you held an asset for more than one year before disposition, it may qualify for long-term capital gains rates, which are usually lower than short-term rates (ordinary income tax rates).

• Specific identification vs. default methods: If you can specifically identify which units you sold (and you have records to support it), you can generally use specific identification to compute basis. Otherwise, many taxpayers use FIFO (first-in, first-out). Keep documentation showing which coins were identified and how you calculated basis. (IRS guidance on virtual currencies explains the tax principles that apply: https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies.)

• Wash sales: As of 2025, wash sale rules explicitly apply to stocks and securities. Because the IRS classifies virtual currency as property (not a security), wash-sale rules have not been officially applied to crypto in IRS guidance. That said, legislative or regulatory changes could change this, so monitor new guidance or consult a tax pro.

Reporting and forms you’ll likely use

• Form 8949 and Schedule D (Form 1040): Report capital gains and losses from sales or exchanges of property, including cryptocurrency. Many broker-like services that qualify as “brokers” will issue 1099-B or 1099-DA style reporting; however, not all crypto platforms issue these forms, so it’s your responsibility to report transactions even without a form (see our Form 8949 guide: https://finhelp.io/glossary/form-8949-sales-and-other-dispositions-of-capital-assets-applicable-to-cryptocurrency/).

• Form 1040 — Other Income: Report ordinary income from mining, staking rewards, airdrops, or business receipts where crypto was received as payment.

• Schedule C: If you operate as a trade or business (e.g., professional miner or crypto business), report business income and related expenses on Schedule C.

• Information returns: If you receive forms like 1099-K or 1099-B from exchanges, reconcile those amounts to your records. Some platforms may send 1099s that don’t fully match your tax calculations because of differing cost-basis methods—reconciliation is essential.

Recordkeeping: what to track and why it matters

Good records make tax reporting accurate and defensible in an audit. Track the following for each transaction:

• Date and time of each acquisition and disposition
• Amount and type of cryptocurrency
• USD value at acquisition and disposition (source of the FMV)
• Cost basis and fees
• Transaction ID/hash and wallet addresses (where possible)
• Purpose of the transaction (sale, exchange, payment, gift, etc.)

For a structured approach, see our internal guide on Cryptocurrency Recordkeeping Best Practices for Tax Reporting. Use tax software that imports exchange histories and calculates gains/losses, but verify imported data against your own records.

Examples (short, practical scenarios)

1) Simple sale:

• Bought 1 BTC at $5,000; sold 1 BTC later at $10,000. Capital gain = $5,000 (report on Form 8949/Schedule D). If held > 1 year, gain may qualify for long-term capital gains.

2) Trade BTC for ETH:

• Exchanged 0.1 BTC for ETH when BTC FMV was $4,000 (proceeds). If basis in that 0.1 BTC was $1,000, realize a $3,000 gain.

3) Mining as hobby vs. business:

• Mining rewards received as income at FMV. If mining is a business, you may deduct expenses on Schedule C; if hobby, deductions are limited by tax law changes—consult a CPA.

Common mistakes and how to avoid them

• Ignoring small transactions: Every disposition can be taxable. Aggregating many small trades without records leads to incorrect reporting.

• Poor basis tracking: Failing to carry forward correct basis after trades or forks will misstate gains.

• Relying solely on exchange statements: Some exchanges do not include off-exchange transfers, wallet-to-wallet movements, or correct basis adjustments. Reconcile and keep independent records.

• Misclassifying income vs capital events: For example, treating staking rewards as capital gains instead of ordinary income will underreport taxable income.

Practical tips and planning strategies

• Start recordkeeping immediately. If you already have years of transactions, export everything now and use crypto tax software to build a consistent dataset.

• Choose and document a consistent method to identify units sold (specific ID, FIFO, etc.) and keep supporting records.

• When possible, convert large clusters of small transactions into fewer taxable events (timing and strategy can help, but consult a tax pro before changing behavior).

• Consider tax-loss harvesting: Realizing losses to offset gains can reduce taxes, but be mindful of the tax consequences of repurchasing similar holdings.

• Work with a CPA or enrolled agent experienced in crypto. Complex situations—like offshore holdings, staking, or business operations—benefit from professional review.

Resources and authoritative guidance

• IRS: Virtual Currencies — https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies (primary federal guidance; includes Notice 2014-21)
• FinHelp articles: Cryptocurrency Recordkeeping Best Practices for Tax Reporting, Tax Consequences of Selling Cryptocurrency: Reporting and Records, How to Report Cryptocurrency Forks and Airdrops on Your Tax Return

Professional disclaimer

This article is educational and does not constitute individualized tax, legal, or investment advice. Tax law and IRS guidance can change; verify current rules with the IRS (https://www.irs.gov/) and consult a qualified tax professional for help with your specific circumstances.

If you’d like, I can provide a concise checklist you can print and use when preparing your tax return, or help identify relevant sections of your exchange statements to reconcile with Form 8949.