Reality Check: Crypto Gains are Taxable
09/29/2025
It’s one of the biggest—and potentially most expensive—myths in the world of digital assets. You trade some Bitcoin for Ethereum. You use a stablecoin to buy an NFT. It all stays on the blockchain, never hitting your bank account, so it’s not a taxable event, right?
Wrong. And that misconception could land you in hot water with the IRS.
As tax professionals, we see business owners and savvy investors dive into cryptocurrency with incredible strategic foresight, only to treat the tax implications as an afterthought. This is like building a high-performance race car but forgetting to install brakes. It’s only a matter of time before you hit a wall.
The foundational concept you must understand is this: The IRS does not view cryptocurrency as currency. According to longstanding official guidance, the IRS treats virtual currency as property.
Think of your crypto holdings like shares of stock, a piece of investment real estate, or a valuable piece of art. When you dispose of that property, you trigger a taxable event.
What Exactly Is a "Taxable Event" in Crypto?
This is where many investors get tripped up. A taxable event isn’t just selling your crypto for U.S. dollars. The net is cast much, much wider.
Here are the most common transactions that require you to calculate a capital gain or loss:
- Selling Crypto for Fiat Currency: This is the most obvious one. You sell your crypto on an exchange, and the U.S. dollar proceeds land in your account.
- Trading One Cryptocurrency for Another: This is a big one that people miss. Swapping your Ethereum for Cardano isn't a "like-kind" exchange. The IRS views it as if you sold your Ethereum for its fair market value at that moment and then immediately bought the Cardano with the proceeds. You have a taxable gain or loss on the disposition of your Ethereum.
- Using Cryptocurrency to Buy Goods or Services: Did you buy a cup of coffee, a new laptop, or even a car with your crypto? That’s a taxable event. You effectively "sold" the crypto for the U.S. dollar value of the item you purchased.
- Receiving Crypto as Payment: If your business accepts crypto for goods or services, you have taxable revenue. The amount of income you recognize is the fair market value of the crypto in U.S. dollars on the date you received it.
It’s critical to understand that just because cash didn't touch your hands doesn’t mean you don't have a U.S. dollar-denominated tax liability.
The Two Flavors of Crypto Income: Capital Gains and Ordinary Income
Your crypto activities can generate two different types of taxable income, each with its own set of rules.
1. Capital Gains and Losses
This applies when you dispose of crypto you held as an investment (your capital asset). The calculation is simple in theory, but often messy in practice:
- Proceeds (Fair Market Value at time of sale/trade) - Cost Basis (What you paid for it, including fees) = Capital Gain or Loss
Just like with stocks, the holding period matters immensely:
- Short-Term Capital Gain: If you held the crypto for one year or less, the gain is taxed at your ordinary income tax rates—the same rates as your salary or business profits. For high-income individuals, this can be as high as 37%.
- Long-Term Capital Gain: If you held the crypto for more than one year, you benefit from lower long-term capital gains rates, which are typically 0%, 15%, or 20%, depending on your overall income.
Properly tracking your holding periods can translate into thousands of dollars in tax savings.
2. Ordinary Income
Sometimes, you don’t buy crypto—you earn it. In these cases, the crypto is taxed as ordinary income upon receipt. The amount of income is the fair market value of the coins when you gain control over them.
Common examples include:
- Getting Paid in Crypto: As mentioned, if you're an employee or a business owner paid in crypto, it's treated just like wages or business revenue.
- Crypto Mining: If you’re a miner, the value of the coins you successfully mine is ordinary income. If you do this as a business, it’s also subject to self-employment taxes.
- Staking Rewards: When you stake your crypto to help validate a network and earn rewards, those rewards are ordinary income, taxable at the moment you have the ability to transfer or sell them.
Here’s a crucial second step: The crypto you received as ordinary income now has a cost basis equal to the amount you reported as income. When you later sell or trade that crypto, you’ll have a capital gain or loss based on how its value has changed since you received it.
Record-Keeping: Your Best Defense
If the IRS comes knocking, "I didn't know" or "my exchange didn't send me a form" won't be a valid defense. The burden of proof is on you, the taxpayer. Meticulous record-keeping isn't optional; it's your primary line of defense.
For every single transaction, you need to be able to prove:
- The date and time of the transaction.
- The type of cryptocurrency and the amount.
- The U.S. dollar fair market value at the time of the transaction.
- The cost basis and your holding period.
- The purpose of the transaction (sale, trade, purchase, staking reward, etc.).
Trying to reconstruct this information for hundreds or thousands of transactions at the end of the year is a recipe for disaster, inaccuracies, and a massive headache. Using crypto tax software that connects to your exchanges and wallets can be a lifesaver, but you still need to review its work for accuracy.
What About NFTs, Forks, and Airdrops?
The digital asset space is constantly evolving, and the tax guidance often lags. However, general principles apply.
- NFTs (Non-Fungible Tokens): The IRS generally treats NFTs as property. Creating and selling an NFT as an artist typically generates ordinary income. For investors, buying and selling NFTs will generate capital gains or losses. It's worth noting that some NFTs could be classified as "collectibles," which have a higher long-term capital gains tax rate of 28%.
- Hard Forks: When a blockchain splits (a hard fork) and you receive a new cryptocurrency as a result, the IRS has stated this results in ordinary income, provided you have dominion and control over the new coins.
- Airdrops: Similar to a fork, receiving new coins via an airdrop is generally considered ordinary income at the time of receipt.
The Bottom Line: Strategy Is Everything
Navigating the world of crypto taxation is complex. The difference between a smart, tax-efficient strategy and a costly mistake often comes down to proactive planning. This isn't just about year-end reporting; it's about making informed decisions with every transaction.
Are you harvesting losses to offset gains? Are you holding appreciating assets for over a year to secure better tax rates? Is your business prepared to accept crypto payments and account for them correctly?
Don’t wait for a letter from the IRS to find out you’ve been doing it wrong. Take control of your crypto tax strategy today.
Sign up today for a FREE discovery call.
Greg Tobias, Enrolled Agent
Admitted to practice before the Internal Revenue Service
Sources:
- Internal Revenue Service, Notice 2014-21, Guidance on Virtual Currency
- Internal Revenue Service, Rev. Rul. 2019-24, Tax Consequences of a Hard Fork
- Internal Revenue Service, Digital Assets, irs.gov
Internal Revenue Service, Frequently Asked Questions on Virtual Currency Transactions
