Crypto Taxes in US: IRS Rules Explained for 2026

According to IRS Notice 2014-21, virtual currency is categorized as property and a digital representation of value for federal tax purposes. Here is an overview of what taxpayers need to know about crypto taxes in the US:

• Residents who profit from cryptocurrencies are required to pay the same taxes that apply to property transactions.
• The applicable taxes are ordinary income tax and capital gains tax.
• Taxable events subject to gains or losses include crypto selling, trading, and spending.
• Crypto taxes do not apply if you only buy and hold digital currency.
• Virtual currency earned by an independent contractor is considered self-employment income and is subject to ordinary income tax at the fair market value (FMV).

Note that the IRS treats digital assets as property that can be taxable. Digital assets include convertible virtual currencies and cryptocurrencies, stablecoins, and non-fungible tokens (NFTs).

The applicable capital gains tax depends on how long a taxpayer has held digital assets. Ordinary income rates apply if the assets are held for less than one year (after 365 days or less), while preferential rates apply if held for more than a year.

Short-Term Capital Gains Rates

In the United States, digital assets held for one year or less than a year before exchanging, disposing of, or selling are subject to federal taxes at ordinary income tax rates. The applicable federal income tax rates range from 10% to 37%, depending on the tax bracket. As per IRS Publication 544, state income taxes apply in addition to federal rates and vary significantly, from 0% in states like Texas and Florida to over 13% in California. Always check your state’s capital gains treatment when estimating your total tax liability.

Long-Term Capital Gains Rates

Digital assets held for more than one year are subject to long-term capital gains tax rates. The taxable income determines the applicable preferential tax rate, which can be 0%, 15%, or 20%. Additionally, a 3.8% Net Investment Income Tax (NIIT) applies to individuals with net income exceeding the applicable thresholds.

The holding period significantly affects how much tax an individual pays on the same gain. We present examples to illustrate the tax consequences of holding assets for one more day.

Consider a scenario where someone spent $1,500 on a 1 Ethereum purchase in January 2024. Below are the applicable short-term and long-term capital gains tax rates.

• Example 1: If they sold the assets after 364 days (after more than one year) for $4,000, they would gain $2,500. At an ordinary income tax rate of 22%, the tax amount would be $2,500 x 22% = $550.
• Example 2: If they sold the assets after 366 days (more than a year) for the same amount, the $2,500 gain would be subject to a 15% long-term capital gains tax. This amounts to $2,500 x 15% = $375, meaning $175 less in taxes.

Some cryptocurrency transactions are taxed at ordinary income rates and are not subject to capital gains taxes. Under IRS rules, individuals who earn crypto are required to file ordinary income tax returns. On the other hand, disposing of crypto results in capital gains or losses.

• Mining: Crypto gains from mining are considered taxable income and taxed under ordinary income tax rules based on the fair market value at the time of receipt. Those who engage in mining, such as Bitcoin mining, as a form of business may be subject to self-employment tax.
• Staking Rewards: According to Revenue Ruling 2023-14, investors who earn cryptocurrency staking rewards must report their earnings based on the FMV for ordinary income tax purposes. The DOJ mooted the Jarrett v. United States case before a ruling was reached to avoid setting contrary precedent, so no court has overturned the IRS position.

• Airdrops: Under IRS rules, cryptocurrency airdrops are classified as ordinary income at fair market value on the date of receipt.
• Crypto Received as Payment: Digital assets received in exchange for goods or services in a business transaction are subject to ordinary income tax at fair market value on receipt.
• Employment Income in Crypto: Just like individuals who receive wages in USD, employees paid with crypto are subject to federal income tax, FICA, and FUTA tax rules. The IRS requires them to report their earnings as digital asset income.

Not all digital asset transactions involving cryptocurrency are taxable events under IRS rules. Many taxpayers in the US misunderstand the non-taxable crypto events outlined below.

• Buying Crypto with USD: Using fiat currency (USD) to buy Bitcoin, Ethereum, and others is not a taxable event under the rules set by the IRS. The amount and fees paid become the buyer’s cost basis for calculating capital gains.
• Holding Crypto: Holding or owning virtual currency does not generate income, even when its price increases (unrealized gains). Crypto taxes only apply when you sell, trade, or spend.
• Transferring Crypto between Your Own Wallets: Moving cryptocurrency from your own account to another (wallet or exchange) is not a taxable event. However, the original cost basis is carried over, so it is important to keep transfer records.
• Receiving Crypto as a Gift: A gift tax return is not required if an individual receives cryptocurrency as a gift. The recipient inherits the cost basis and the holding period.
• Donating Crypto to a Qualifying Charity: Crypto taxes typically do not apply if the funds are donated to a 501(c)(3) charity. As per IRS Publication 526, state or local tax deductions may apply to charitable contributions under certain circumstances. If donated crypto has been held for more than one year, donors can generally deduct the full fair market value (up to 30% of AGI) without recognizing the capital gain. This makes donating appreciated crypto significantly more tax-efficient than selling and donating cash.

Under the wash sale rule, taxpayers are prohibited from claiming a capital loss on securities if they repurchase almost identical assets within 30 days. This rule applies 30 days before or after the sale (a 61-day window).

According to IRS guidance under IRC Section 1091, the wash sale rule applies to securities. For crypto investors in the United States, it is important to understand that this rule does not apply to cryptocurrencies. This is because cryptocurrencies are categorized as property, not securities.

If an individual invests in digital currencies and incurs losses, they can claim the loss and repurchase the same crypto without worrying about the wash sale rule. However, it is important to note the proposal by Congress to apply the wash sale rule to cryptocurrency. If applied in the future, the IRS may challenge people who make crypto losses and repurchase almost identical assets within the 61-day window.

sses. To calculate your capital gain or loss, you must know the amount received and the cost basis, including any fees paid.

Cost Basis Accounting Methods

Crypto investors can choose from different cost basis methods allowed by the IRS. The tax due depends on the method used.

• First In, First Out (FIFO): As the default method used by the IRS, FIFO assumes that the first assets purchased are the first ones you sell. This method typically generates the highest gains when the market is rising.
• Highest In, First Out (HIFO): When using the HIFO method, investors can lower the taxable gain by selling the highest-cost units first. However, the IRS needs specific identification of the units under sale at the moment the transaction is executed.
• Specific Identification: This means identifying the units the taxpayer is selling, making it easy to manage gains and losses. Detailed records indicating when a transaction took place are needed.

Based on IRS Publication 544 and the IRS virtual currency FAQ page, the IRS can challenge individuals who change their cost basis accounting method. Therefore, consistency and accurate record-keeping are paramount.

Crypto investors should fill out tax forms accurately and contact tax professionals if they need further assistance. As per the Internal Revenue Code, taxpayers must maintain records for federal income tax returns. Follow the steps outlined below to report crypto transactions to the IRS and ensure compliance with US tax laws.

Step 1: Answer the digital assets question on Form 1040

Any US taxpayer who has sold, exchanged, disposed of, or received digital assets is subject to federal income tax returns. They must report these activities on IRS Form 1040 and also specify whether they received crypto assets as a reward or award.

Step 2: Complete Form 8949 for capital gains and losses

US citizens can use Form 8949 (Sales and Other Dispositions of Capital Assets) to report crypto disposal. The required information includes the asset and date of acquisition, sale date, gross proceeds, cost basis, and the capital gain or loss. There are different sections for reporting long-term and short-term capital gains, with totals flowing to Schedule D. The required details include the date of the transaction, the fair market value in USD when purchasing, the fair market value when selling, and fees.

Step 3: Report crypto income on Schedule 1 or Schedule C

Under ordinary income tax rules, the IRS requires taxpayers to report income earned through mining, staking, or digital assets received as payments on Form 1040. Schedule 1 applies to individuals, while Schedule C applies to those operating as businesses or acting as independent contractors paid in digital assets.

Step 4: Keep Records and Store Supporting Documentation

Taxpayers should keep records of every crypto transaction, including the date of acquisition, the fair market value in USD at the time of receipt or disposal, wallet addresses, exchange statements, and any fees paid. Records should be kept for a minimum of three years from the filing date, or six years if income was significantly underreported. Crypto tax software such as Koinly, CoinTracker, or TaxBit can automate much of this process.

*Note on Deadline: The IRS requires taxpayers to file their crypto and digital asset taxes by April 15.

Yes, the Internal Revenue Service can track crypto transactions and identify individuals who do not pay taxes. The agency can track your crypto activity in the following ways.

Exchange Reporting

Coinbase, Kraken, and other platforms based in the US report crypto exchange transactions on 1099 forms. From the 2025 tax year onward, brokers must report crypto transactions on Form 1099-DA, Digital Asset Proceeds from Broker Transactions. Taxpayers receive tax documents to file income tax returns easily.

Blockchain Analysis

Tools that can analyze transactions on the blockchain allow the IRS to track an individual’s digital asset transactions. The IRS criminal investigation team works with various companies that help monitor blockchains.

John Doe Summonses

The IRS can issue legal documents to crypto exchanges and request access to customer data. This includes information about unidentified taxpayers.

Cryptocurrency in the United States is taxed as property under IRS rules. Whether you’re realizing capital gains, earning staking rewards, or mining, each activity carries distinct reporting rules. While non-taxable events such as buying and holding provide some flexibility, the IRS’s growing enforcement capabilities, from exchange reporting to blockchain analysis, make compliance increasingly difficult to avoid. Consulting a tax professional remains the most reliable way to navigate your individual obligations.