Quick overview
Selling cryptocurrency triggers a taxable event in most cases. The IRS treats virtual currency as property (see IRS Notice 2014-21 and the IRS Virtual Currency FAQ), so gains and losses follow capital gains rules rather than ordinary income rules used for wages. This article explains how to calculate gains and losses, which forms to file, recordkeeping best practices, and common reporting pitfalls I see in practice.
How gains and losses are calculated
- Basis: Your cost basis is usually what you paid for the crypto, including fees and commissions. If you received crypto as income (mining, staking, payment for goods/services), basis is the fair market value at receipt [IRS Virtual Currency FAQ].
- Realized gain or loss = Amount you received on sale (in USD) − Adjusted basis.
- Holding period: If you held the asset for more than one year before selling, any gain is treated as a long-term capital gain (lower tax rates). If you held it for one year or less, it’s a short-term capital gain taxed at ordinary income tax rates.
Example: You bought 1 BTC for $5,000 and sold it two years later for $10,000. Your realized long-term capital gain is $5,000.
Which transactions are taxable events?
Taxable events include (but are not limited to):
- Selling cryptocurrency for U.S. dollars (fiat).
- Trading one cryptocurrency for another (e.g., BTC → ETH).
- Using cryptocurrency to buy goods or services.
- Receiving crypto as compensation, from mining, staking rewards, or as an airdrop (these can create ordinary income at receipt; further disposition may create capital gain/loss).
Non-taxable events: moving crypto between wallets you own or transferring currency between your own accounts is not a sale and typically is not a taxable event.
Required forms and reporting steps
- Form 8949 — Sales and Other Dispositions of Capital Assets: Report each taxable crypto disposition here, showing acquisition date, sale date, cost basis, proceeds, and gain/loss. The IRS expects individual transactions unless your broker provides a consolidated report you can rely on (see the IRS Form 8949 page).
- Schedule D (Form 1040) — Capital Gains and Losses: Totals from Form 8949 carry to Schedule D to compute net capital gain or deductible losses.
- Other income forms: If you received crypto as payment, staking, or mining rewards, that income should be reported as ordinary income on Schedule 1 or Schedule C depending on whether it’s business income.
Note: Exchanges may issue Forms 1099-K, 1099-B, or broker statements. Reporting by third parties doesn’t replace your obligation to file accurate information—reconcile exchange statements with your own records.
See our detailed guidance on Form 8949 for cryptocurrency reporting for step-by-step help.
Cost basis methods and identification rules
- Specific identification: If you can specifically identify which units you sold (by date and txid) and you documented the method at the time of sale, you can use that to calculate gain or loss. I routinely advise clients to use specific identification when possible because it usually minimizes taxes.
- FIFO: If specific ID is not available or not documented, many taxpayers default to FIFO (first-in, first-out). Be consistent year-to-year and keep documentation.
IRS guidance permits reasonable methods backed by records; inconsistent or unsubstantiated methods increase audit risk [IRS Notice 2014-21].
Broker reporting and evolving rules
Tax reporting for digital assets has been evolving rapidly. Brokers and exchanges may send different forms (1099-B, 1099-K), and new broker-reporting rules for digital assets have been enacted or proposed in recent years. Because exchange statements sometimes omit basis or use different accounting methods, reconcile those statements with your transaction-level records.
Two practical tips:
- Don’t assume a 1099 is complete. Reconcile reported proceeds and basis line-by-line with your own tax software or spreadsheets.
- Save every exchange statement and transaction export; exchanges can and do change reporting formats.
Recordkeeping checklist (what to keep and for how long)
- Transaction exports (CSV or JSON) from exchanges and wallets showing date/time, received/sent amounts, transaction IDs, and USD values at transaction times.
- Purchase receipts, invoices, or documentation of crypto received as payment, mining, airdrops, or staking rewards showing fair market value at receipt.
- Wallet addresses and documentation showing transfers between wallets you control.
- Exchange statements, Forms 1099-B/1099-K, and any broker-provided cost-basis reports.
- Documentation of your cost-basis selection method and any specific-identification statements.
Keep records for at least three years from the date you file (longer if you have unreported income or substantial carryovers) and follow IRS guidance on substantiating basis [IRS Publication 551].
Common mistakes and how to avoid them
- Not reporting crypto-to-crypto trades: Many taxpayers think trades are not reportable. They are — treat them as sales.
- Blindly using exchange summaries: Exchange reports may misstate basis or omit transactions. Always reconcile.
- Poor recordkeeping: Without txids, timestamps, and USD valuations, it’s hard to substantiate specific-identification claims.
- Misapplying wash-sale rules: As of 2025, the wash-sale rules that apply to stocks and securities (IRC §1091) generally do not apply to cryptocurrencies because the IRS treats crypto as property, not securities. However, legislation or rule changes could alter this, so verify annually.
Practical workflow I use with clients
- Pull raw transaction data from every exchange and wallet (CSV/JSON). 2. Normalize timestamps and convert each transaction to USD at time of transaction. 3. Reconcile exchange-issued forms (1099-K/1099-B) with raw exports. 4. Apply cost-basis method (specific ID where available). 5. Generate Form 8949 rows and import into tax software; review Schedule D totals. 6. Retain a reconciliation workbook and backup of raw exports.
Using a reputable crypto tax tool (CoinTracker, TokenTax, CoinTracking, or similar) speeds this process—my practice uses these tools to reduce manual error—just be sure to export the underlying transaction data to maintain an audit trail.
Loss harvesting and timing strategies
- Short-term vs long-term: Holding crypto just over one year can convert short-term (higher-rate) gains into long-term gains, often taxed at lower rates. Plan sales around your overall tax picture.
- Loss harvesting: Realized losses from crypto can offset realized gains and up to $3,000 of ordinary income per year (with carryforward of excess losses). Coordinate loss harvesting with a tax advisor to preserve your investment thesis while optimizing tax outcomes.
What to do if you receive a notice or mismatch letter
If the IRS sends a notice (e.g., CP2000 or mismatch letter) claiming unreported income from exchange-reported transactions, don’t panic:
- Compare the IRS’s numbers to your reconciled transaction workbook.
- If the IRS used a gross-proceeds figure (e.g., without considering basis), supply your Form 8949 and supporting records showing basis and adjustments.
- Consider hiring a tax professional experienced with crypto to respond timely and accurately.
See our guidance on taxpayer rights and interacting with the IRS if you receive correspondence.
Recent regulatory developments and what to watch (2024–2025)
Rules and reporting obligations for digital assets continue to evolve. Stay current on:
- Broker-reporting rules for digital assets and how exchanges implement them.
- Any statutory changes that alter third-party reporting thresholds (Forms 1099-K/1099-B) or impose wash-sale–type rules on crypto.
Always check the IRS Virtual Currency FAQ and Form 8949 guidance each tax season for updates: https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions and https://www.irs.gov/forms-pubs/about-form-8949.
Where to get help
- Consult your CPA or tax advisor if you have multiple exchanges, high-frequency trading, or complex events (staking, forks, airdrops).
- Use specialized tax software to generate reports and Form 8949 imports.
- If you want step-by-step instructions on filling out Form 8949 for crypto sales, see our glossary entry on Form 8949 – Sales and Other Dispositions of Capital Assets (applicable to cryptocurrency) and our article on The Tax Rules for Cryptocurrency and Virtual Currencies.
Final takeaways
- Selling crypto is typically a taxable event; track basis, dates, and USD values.
- Report each disposition on Form 8949 and Schedule D; report income events separately.
- Reconcile exchange statements with your own transaction records to avoid mismatches.
Professional disclaimer: This article provides general information only and does not constitute tax advice. Tax rules change; consult a qualified tax professional for advice about your specific situation.
Author credentials: I am a CPA with 15+ years advising individual investors on tax compliance and planning, including cryptocurrency reporting.