In the United States, cryptocurrency is generally taxed as property, not as currency. That means many crypto activities trigger capital gains/losses rules similar to stocks, while certain receipts (like mining or staking rewards) are typically treated as ordinary income. The IRS has also increased reporting and enforcement, and taxpayers are expected to keep detailed records of transactions.

1) Core IRS Position: Crypto Is “Property”

The IRS treats “virtual currency” (including cryptocurrency) as property for federal tax purposes. This framework was established in:

• IRS Notice 2014-21 (foundational guidance)
• IRS Virtual Currency FAQs (updated guidance and examples)

Practical impact: When you dispose of crypto (sell, trade, spend, etc.), you generally have a taxable event and must compute gain or loss.

2) What Counts as a Taxable Event?

A) Common taxable events (most frequent)

• Selling crypto for USD (or other fiat)
• Trading one crypto for another (e.g., ETH → SOL)
• Spending crypto on goods/services (e.g., buying a laptop with BTC)
• Receiving crypto as payment for work/services
• Mining rewards (generally income when received)
• Staking rewards (generally income when received)
• Airdrops (often income when you have “dominion and control”)
• Hard fork receipts (often income if you receive new units and have control)

B) Common non-taxable events (often misunderstood)

• Buying crypto with USD (no gain/loss at purchase)
• Holding crypto (no tax until disposition)
• Transferring crypto between your own wallets (not taxable by itself, but recordkeeping is crucial)

3) Capital Gains and Losses (Sales, Trades, Spending)

A) How gain/loss is calculated

For each taxable disposal, you generally compute:

• Proceeds = fair market value (FMV) in USD at the time of disposal
• Cost basis = what you paid (plus certain fees), in USD
• Capital gain/loss = proceeds − cost basis

B) Short-term vs long-term

• Short-term: held 1 year or less; taxed at ordinary income tax rates
• Long-term: held more than 1 year; taxed at preferential long-term capital gains rates (depending on income bracket)

C) Example: Selling crypto for USD

Example: You buy 1 ETH for $1,500 (including fees). Six months later, you sell it for $2,100 (net of fees).

• Proceeds: $2,100
• Basis: $1,500
• Short-term capital gain: $600

D) Example: Trading crypto for crypto

Example: You bought 0.1 BTC for $3,000. Later you trade that 0.1 BTC for ETH when the 0.1 BTC is worth $4,200.

• This is treated as if you sold 0.1 BTC for $4,200 and then bought ETH for $4,200.
• Capital gain: $4,200 − $3,000 = $1,200

E) Example: Spending crypto

Example: You bought 0.05 BTC for $1,500. Later you use it to buy a phone when that 0.05 BTC is worth $2,000.

• Taxable gain: $2,000 − $1,500 = $500

4) Ordinary Income Crypto Events (Wages, Mining, Staking, Airdrops)

A) Getting paid in crypto

If you receive crypto as compensation (employee wages or contractor payment), the FMV at receipt is generally ordinary income.

• Employees: typically reported on Form W-2
• Independent contractors: often on Form 1099-NEC (depending on payer reporting)

B) Mining

Mining rewards are generally included in income at FMV when received. If mining is a trade or business, it may also be subject to self-employment tax.

• Reference: Notice 2014-21 (mining guidance)

C) Staking rewards

The IRS has indicated (through FAQs and enforcement posture) that staking rewards are generally treated as income when received at FMV, though there has been taxpayer litigation and ongoing debate in some edge cases. Many filers take a conservative approach consistent with IRS FAQs.

• Reference: IRS Virtual Currency FAQs

D) Airdrops and hard forks

IRS guidance generally treats airdrops/hard fork receipts as income when you have dominion and control (i.e., you can sell, transfer, or otherwise dispose of the coins).

• Reference: IRS FAQs

E) Example: Staking income then later sale

Example: You receive 10 tokens from staking on a day they’re worth $2 each. Later you sell them for $3 each.

• At receipt: ordinary income = 10 × $2 = $20
• Basis in those tokens becomes $2 each
• At sale: capital gain = 10 × ($3 − $2) = $10

5) Cost Basis Methods and Recordkeeping

A) Tracking lots

You must determine which units you disposed of to compute basis. Common approaches:

• Specific identification (if you can document which units/lot were sold)
• FIFO (first-in, first-out) is commonly used when specific ID isn’t supported

In practice, many exchanges and tax software tools help track lots, but you are responsible for accuracy.

B) Records you should keep

• Date/time of each transaction
• Amount and type of crypto
• USD FMV at the time (and source of pricing)
• Fees paid
• Wallet addresses/exchange transaction IDs
• Purpose (trade, purchase, transfer, reward, etc.)

6) Reporting: Forms and Where It Goes on Your Return

A) The “digital asset” question

The IRS includes a “digital asset” question on Form 1040 (wording may vary by year). You must answer truthfully based on whether you engaged in digital asset transactions during the year.

B) Capital gains reporting

• Form 8949: list each taxable disposal (sales/trades/spends)
• Schedule D: summarizes capital gains/losses

C) Ordinary income reporting (examples)

• Wages in crypto: Form W-2 → Form 1040 wages line
• Self-employment income in crypto: Schedule C (and possibly Schedule SE)
• Other income (certain airdrops/rewards): may be reported as “Other income” depending on facts

D) Exchange reporting (1099 forms)

Some exchanges issue forms such as 1099-MISC/1099-NEC (for rewards) or other reporting statements. Also, broker reporting rules for digital assets are evolving; you should reconcile any forms received with your own records.

7) Losses, Wash Sales, and Tax-Loss Harvesting

A) Capital losses

Capital losses can offset capital gains. If losses exceed gains, up to $3,000 per year may generally offset ordinary income (with the remainder carried forward).

B) Wash sale rule (important nuance)

Under current federal law, the classic wash sale rule in IRC §1091 applies to stocks and securities. Whether it applies to crypto is a nuanced area; historically many practitioners have taken the position that crypto is not a “security” for §1091 purposes, but the law and enforcement landscape can change, and proposed legislation has aimed to extend wash sale rules to digital assets.

Practical takeaway: Be cautious with rapid sell-and-rebuy strategies. Even if wash sale treatment is not clearly mandated for crypto in all cases, aggressive positions can increase audit risk and may be affected by future rule changes.

8) NFTs, DeFi, and Other Complex Areas (High-Level)

A) NFTs

• Buying an NFT with crypto can trigger a taxable disposal of the crypto you spent.
• Selling an NFT can create capital gain/loss on the NFT (basis typically includes purchase price plus fees).
• Some NFTs may be treated as “collectibles” depending on what they represent; this can affect tax rates for long-term gains in some cases (facts-and-circumstances).

B) DeFi lending, liquidity pools, wrapping tokens

DeFi activities can involve multiple taxable events (swaps, receipt of reward tokens, interest-like income, etc.). The tax characterization can be fact-specific and sometimes unclear in existing guidance.

• Swaps are typically treated as dispositions.
• Rewards may be ordinary income at receipt (FMV).
• Liquidity pool tokens and “wrapping” can raise questions about whether a taxable exchange occurred.

For substantial DeFi activity, many taxpayers use specialized crypto tax software and/or consult a tax professional.

9) State Taxes

Most states that impose an income tax generally follow federal concepts of income and capital gains, but details vary (and some states have no income tax). Always check your state’s rules for reporting and conformity.

10) Penalties and Compliance Notes

• Failure to report taxable crypto transactions can lead to interest and penalties.
• In serious cases, willful noncompliance can raise criminal concerns.
• Because exchanges and third parties increasingly report to the IRS, mismatches between your return and reported data can trigger notices.

11) Quick “Cheat Sheet” Summary

• Buying crypto with USD: not taxable
• Selling crypto: capital gain/loss
• Trading crypto for crypto: capital gain/loss
• Spending crypto: capital gain/loss
• Mining/staking/airdrops: typically ordinary income at receipt (FMV)
• Later sale of received rewards: capital gain/loss from basis set at receipt

References (Primary)

• IRS Notice 2014-21
• IRS: Frequently Asked Questions on Virtual Currency Transactions
• IRS: About Form 8949
• IRS: About Schedule D (Form 1040)

Note: This is general educational information, not legal or tax advice. If you share what types of crypto activity you had (trading, staking, DeFi, NFTs, mining, business payments), I can outline how those specific transactions are typically handled and what records you’d want to gather.