How are crypto gains taxed: a worked example
How are crypto gains taxed in the US? A worked example with short-term and long-term rates, cost basis, and what triggers a taxable event.
How are crypto gains taxed? In the US, the IRS treats crypto as property, so selling, swapping, or spending it triggers a capital gain or loss taxed at short-term (ordinary income) or long-term (0-20%) rates depending on how long you held it.
That property classification, laid out in IRS Notice 2014-21, is the whole mechanism. Crypto isn't currency for tax purposes. Every disposal is a taxable event, and you calculate gain or loss the same way you would for a stock: proceeds minus cost basis.
What counts as a taxable event
Four things trigger tax: selling crypto for dollars, trading one coin for another, spending crypto on goods or services, and in some interpretations receiving staking or mining rewards (taxed as income when received, then again as a capital gain when later sold). Buying crypto with cash and holding it is not taxable. Moving crypto between your own wallets is not taxable. The line is disposal, not possession.
How do you calculate the actual gain
Say you bought 1 ETH for $1,800 in March 2023. In March 2024, you traded it for a different token when ETH was worth $3,600. That trade is a taxable event even though you never touched dollars. Your gain is $3,600 minus $1,800 basis, which equals $1,800.
Because you held for more than a year, that $1,800 qualifies for long-term capital gains rates: 0%, 15%, or 20% depending on your total taxable income. Someone in the 15% bracket owes $270. If you'd made the same trade at the 11-month mark, it would be short-term and taxed as ordinary income instead, which for many filers means a rate closer to 22-24%, or $396-$432 on the same gain.
That holding-period gap is the single biggest lever most people control. Waiting past the one-year mark on a position that's already up can cut the tax bill by a third or more, assuming the price doesn't move against you in the meantime.
What about cost basis when you've made multiple buys
If you bought ETH three separate times at three different prices, you need to know which lot you're selling. The IRS lets you use specific identification if your records support it, meaning you pick which lot to sell and document it at the time of the transaction. Without adequate records, default methods like FIFO (first in, first out) apply, which can produce a different, often larger, gain than if you'd chosen to sell your highest-cost lot. Exchanges that generate 1099 forms are moving toward tracking this per-wallet under new 2025 broker reporting rules, but self-custody wallets still put the recordkeeping burden on you.
What about losses
Capital losses offset capital gains dollar for dollar, and up to $3,000 of net losses can offset ordinary income per year, with the rest carried forward. Unlike stocks, crypto currently has no wash-sale rule at the federal level, so you can sell a losing position and immediately rebuy the same asset, locking in the loss for tax purposes while keeping your position. That's a real, legal difference from equity trading, though proposed legislation has aimed to close it, so don't assume it's permanent.
What should you check before filing
Pull a full transaction history from every exchange and wallet you've used, including swaps and any DeFi activity, since cost basis errors compound if a wrong number carries forward from an earlier trade. Confirm whether your country or state adds its own layer. Some states tax crypto gains as ordinary income with no separate capital gains rate at all. If you've received staking rewards, airdrops, or NFT income, treat those as separate ordinary-income events on top of any later capital gain or loss. And if your trade count runs into the hundreds, tax software built for crypto (not general filing software) will save you from manually reconstructing cost basis across a dozen wallets.