How is crypto taxed in the US? A practical guide

What the IRS says: basic classification and why it matters

The IRS treats cryptocurrency as property for U.S. federal tax purposes, a position first set out in Notice 2014-21 and later reflected on the agency’s virtual currency guidance pages, and that classification determines whether an event is treated as ordinary income or as a capital gain or loss Notice 2014-21.

Because the agency views crypto as property, disposals can trigger capital gains or losses, while receipts may be ordinary income depending on the facts and timing of the transaction IRS virtual currency guidance.

Short examples help make the point: selling a token for U.S. dollars is a disposition that can create a capital gain or loss, while receiving tokens for work is generally ordinary income when you obtain control of those tokens IRS virtual currency guidance.

Property classification explained

Calling crypto property means the tax rules that apply to stocks or real estate often guide treatment, for example using cost basis and measuring gain on disposal; however, the specific facts matter for items like rewards or forks Notice 2014-21.

Why classification affects taxes

Different tax types follow from classification: ordinary income rates apply for receipts taxed on receipt, while capital gain rules apply when a taxpayer disposes of property after holding it for some time IRS virtual currency guidance.

Which events are taxable: sales, trades, spending, and receiving crypto

Common taxable events include selling crypto for fiat currency, trading one token for another, using crypto to buy goods or services, and receiving crypto as income for work or rewards IRS FAQ on virtual currency transactions.

Each event has a different tax label: sales and trades usually raise capital gain or loss issues, while receipts tied to pay or rewards tend to be ordinary income at the time of receipt IRS virtual currency guidance.

Timing matters: if you receive tokens today and later sell them, you may have ordinary income at receipt and a separate capital gain or loss when you sell.

Common taxable events listed

Examples that commonly trigger reporting are:

• Selling crypto for U.S. dollars, which usually creates a capital gain or loss reported on capital forms
• Trading one cryptocurrency for another, which is treated as a disposition and a new acquisition
• Spending crypto to buy goods or services, which is usually a taxable sale of property
• Receiving crypto as wages, contractor pay, or rewards, which is often ordinary income when received

For most taxpayers, reviewing each transaction for both the receipt and disposition side helps identify what to report IRS FAQ on virtual currency transactions.

How timing of receipt or disposal matters

The moment you have dominion and control, or when an item is paid to you, typically marks when ordinary income may be recognized; later sales create capital calculations based on your cost basis and holding period IRS virtual currency guidance.

Income events: wages, airdrops, staking rewards and how they’re taxed

If you are paid wages or contractor income in crypto, the fair market value of the crypto at receipt is generally treated as ordinary income and should be reported on Form 1040, with Schedule C used when the activity is business related IRS FAQ on virtual currency transactions.

Did you receive staking rewards or an airdrop this year?

Airdrops and staking rewards are typically taxed as ordinary income when the taxpayer has control or receipt of the asset, and any later sale of those assets is then treated as a capital gain or loss based on the receipt value as basis Tax Foundation overview.

That said, guidance on specific staking arrangements and some airdrops can be complex or evolving, so the taxpayer’s facts and the protocol mechanics can change timing and valuation outcomes PwC tax considerations for cryptoassets.

Wages and contractor income paid in crypto

When your employer pays wages in crypto, federal withholding and reporting rules typically apply to the USD value at the time of pay, and those amounts flow into the ordinary income lines on your return.

Airdrops, staking, and rewards: taxable at receipt

For many common situations, control or receipt is the taxable moment for rewards. Keep records of the date and USD value when you obtained control to establish your basis for later sales Tax Foundation overview.

Later disposition of income receipts

After ordinary income treatment at receipt, subsequent sales of those same tokens produce capital gain or loss measured from the income-recognition value; this creates two distinct tax events to track PwC tax considerations for cryptoassets.

Cost basis and holding period: how gains and losses are calculated

Cost basis is usually the fair market value in U.S. dollars at the time you acquire the crypto, and that basis is used to compute capital gain or loss on a later sale IRS virtual currency guidance.

Your holding period, measured from acquisition to disposal, determines whether a gain is short term or long term, which affects the tax rate applied to the gain.

What counts as cost basis

Typical basis rules: use the USD value when you bought or received the asset, but special rules apply for gifts and inherited property where different basis rules can change the calculation Notice 2014-21.

Short term versus long term holding period

If you hold an asset for more than one year before selling, the gain is long term and generally taxed under capital gains rates; shorter holdings are short term and taxed at ordinary rates.

Where to report crypto on your federal return: forms and line items

Capital gains and losses from crypto disposals are reported on Form 8949 and summarized on Schedule D, with short versus long term treatment based on holding period IRS FAQ on virtual currency transactions.

Ordinary income from crypto, such as wages or certain rewards, is reported on the income lines of Form 1040, while business-related crypto receipts and expenses may be reported on Schedule C IRS virtual currency guidance.

Form 8949 and Schedule D for capital transactions

When you sell or trade crypto, list each disposition on Form 8949 with dates, proceeds, cost basis, and gain or loss, then carry totals to Schedule D for your tax return IRS FAQ on virtual currency transactions.

Ordinary income reporting on Form 1040, Schedule 1, or Schedule C

Report ordinary income items like wages or nonemployee compensation as specified on Form 1040 and use Schedule C if the activity meets the criteria for business income; keep clear records to support those amounts IRS virtual currency guidance.

Valuation challenges: how to determine fair market value and handle exchanges

Fair market value is generally measured in USD at the time of the transaction; many taxpayers use an exchange price that fairly reflects market value at the transaction time to set basis and proceeds IRS virtual currency guidance.

When you trade one crypto for another, treat the trade as a disposal of the first asset and an acquisition of the second, using USD values for both sides to compute gain and set the new basis.

Using exchange prices and time-of-transaction valuation

Practical valuation uses reliable price data for the exact time of each transaction; keep timestamped records and USD conversion references to show how you calculated basis and proceeds Tax Foundation overview.

Complex cases and matching rules

Illiquid tokens, forks, or pooled rewards can create unclear valuation moments; in those cases careful documentation of when you had control and how you measured USD value helps support your reporting PwC tax considerations for cryptoassets.

Special events and gray areas: staking, forks, pooled staking, and complex receipts

Staking rewards and certain forks raise timing and control questions that can affect whether and when income is recognized, and guidance in these areas is still developing Tax Foundation overview.

Pooled staking and protocol mechanics can change when you have dominion over new tokens, making the record of the protocol event and the date you could withdraw or transfer tokens important for tax timing PwC tax considerations for cryptoassets.

Because the IRS position treats many digital assets as property, the facts about control, receipt, and protocol mechanics can determine whether you report ordinary income immediately or only record a later capital event Notice 2014-21.

Why staking and forks raise open questions

Staking rewards often depend on whether the taxpayer can transfer or sell the reward immediately; if you have control, many advisors treat the USD value at that moment as ordinary income, though the specifics can vary by arrangement Tax Foundation overview.

How pooled staking and protocol mechanics can change timing

In pooled setups, the pool operator’s mechanics may delay when an individual token holder can access rewards, and that delay can affect the taxable moment; documenting access rights and timestamps is important for support.

Recordkeeping and bookkeeping: what to track and for how long

Consistent time stamps and a traceable USD conversion method make it easier to reconcile broker statements and prepare Form 8949 entries.

Essential records: dates, amounts, receipts, and exchange history

At minimum, save the date of acquisition and disposal, the fair market value in USD at each point, transaction identifiers, and any exchange statements that corroborate totals.

How long to keep records and why

Keep records for the period required by tax rules and until any statute of limitations issues are resolved; retaining detailed backups helps if the IRS requests clarification or if you need to amend a prior return.

Common mistakes and red flags that trigger audits or penalties

A frequent error is omitting crypto-to-crypto trades or spending crypto for purchases, which can create mismatches if broker reporting or 1099 forms are also issued to the IRS Chainalysis report on adoption and compliance.

Underreporting income or failing to record ordinary income items such as wages or rewards increases the risk of follow up when third-party reporting is present.

Underreporting and missing taxable events

Missing transactions often come from not tracking small trades, fee conversions, or off exchange transfers that are technically dispositions; reconciling your full history can reduce mistakes IRS FAQ on virtual currency transactions.

Mismatched broker reporting and taxpayer filings

As broker and exchange reporting grows, mismatches between taxpayer forms and IRS records become a common trigger for notices; comparing your records to any informational forms you receive helps spot discrepancies early Chainalysis report on adoption and compliance and crypto exchange affiliate programs on Finance Police.

Broker reporting, enforcement trends, and why compliance is increasing

Analyses through 2024 and 2025 show rising crypto activity and persistent underreporting, which has led the IRS to emphasize enforcement and expand reporting proposals to improve compliance Chainalysis report on adoption and compliance.

For individual filers, the practical result is that more informational forms and third-party reports may arrive, making it important to reconcile those documents with your tax return. See also our article on more businesses accepting crypto on websites.

Recent analyses on activity and underreporting

Industry and government studies highlight gaps between on-chain activity and reported tax activity, a primary reason behind increased enforcement attention and reporting proposals Chainalysis report on adoption and compliance.

How expanded reporting can affect individual filers

Expect more documentation from brokers and custodians; using those statements to cross-check your own records reduces the chance of mismatches that trigger IRS notices.

State tax considerations and where to check local rules

State tax treatment of crypto varies; some states follow federal treatment closely, while others may have differences in timing or reporting, so check your state tax agency for specific guidance.

When in doubt, use state tax department resources and consider whether your state conforms to federal definitions and timing for the tax year in question.

Step-by-step: how to calculate and report a simple crypto gain

Start by gathering the transaction record, the date you acquired the asset, the USD cost basis at acquisition, the date of sale, and the USD proceeds at sale; compute gain as proceeds minus basis IRS FAQ on virtual currency transactions.

Next determine the holding period to classify the gain as short term or long term, then list the disposition on Form 8949 and carry totals to Schedule D as required.

Example workflow for a sale for fiat

Checklist: 1) export transaction history, 2) find the acquisition USD value to set basis, 3) find the sale USD proceeds, 4) compute gain or loss, 5) note holding period, 6) report on Form 8949 and Schedule D.

Filling Form 8949 and Schedule D in practice

On Form 8949 enter each sale with dates, proceeds, cost basis, and gain or loss. After totaling, transfer the summary numbers to Schedule D and follow the form instructions to compute net capital gain or loss for the year.

Practical scenarios: five short examples you can relate to

Selling BTC for USD. Event type: sale for fiat. Tax result: capital gain or loss based on USD proceeds minus basis, holding period matters. Keep exchange records showing timestamps and USD amounts IRS virtual currency guidance.

Swapping ETH for another token. Event type: crypto-to-crypto trade treated as a disposition of ETH and acquisition of the new token; both sides need USD values to calculate gain and new basis IRS FAQ on virtual currency transactions.

Using crypto to buy goods. Event type: spending crypto creates a taxable disposition measured by the USD fair market value of what you purchased, with gain or loss computed from your basis.

Wages paid in crypto. Event type: ordinary income at receipt measured by USD value, which becomes your basis for later capital calculations if you sell those tokens IRS FAQ on virtual currency transactions.

Receiving staking rewards. Event type: often ordinary income at the time you have control, and a later sale creates capital gain or loss measured from that receipt value Tax Foundation overview.

Conclusion: practical next steps and authoritative resources

Before filing, gather full transaction records, reconcile any broker or exchange statements, compute USD basis and proceeds, determine holding periods, and identify whether any items are business income that belong on Schedule C IRS virtual currency guidance.

When in doubt, review primary IRS guidance and the recent industry analyses cited here, and consider professional help for complex staking or pooled arrangements; our crypto section at Finance Police offers plain language explainers to help you organize your facts before you consult an advisor.