Crypto Trading Tax Guide: How Every Trade Type Is Taxed

IRS Notice 2014-21 classifies cryptocurrencies as property or capital assets for federal tax purposes. Disposing of digital assets can lead to a capital gain or loss. Therefore, virtual currencies are subject to capital gains tax.

Taxable disposal events include:

• Selling crypto for U.S. dollars (USD) or other fiat currencies
• Trading one cryptocurrency for another
• Purchasing goods and services using crypto
• Swapping digital coins on a decentralized crypto exchange

The capital gain or loss is calculated by subtracting the cost basis from the total crypto sales in USD at the time of receipt. Short-term or long-term tax treatment is determined by the holding period, and different federal income tax brackets apply.

Any amount gained from selling cryptocurrency is considered taxable income.

The Calculation: To determine how much tax you owe after selling crypto, subtract the cost basis or acquisition cost from your sale proceeds in USD. Long-term capital gains rates (0%, 15%, or 20%) apply if crypto is held for more than a year. Short-term capital gains from crypto held for a year or less are subject to ordinary income tax rates from 10% to 37%.

A Worked Example: With fees included, let’s say the total cost of purchasing 0.5 ETH in February 2024 was $1,200. Here is the calculation if the same amount was sold for $2,000 in March 2026:

• Under IRS rules, the holding period is long-term because the crypto was held for more than a year
• Gain = $800, calculated by subtracting $1,200 from $2,000
• A long-term crypto tax rate of 15% is applicable, so the tax owed is $120

Fees at Sale: Any trading fees paid reduce the reported sale amount and consequently the tax owed. If a $20 trading fee applied to a $2,000 sale, the amount subject to taxation would be $1,980.

Most crypto traders are surprised to learn that trading one cryptocurrency for another is subject to cryptocurrency taxes. Check the IRS FAQ on virtual currencies for more information.

The Mechanics: Traders may owe capital gains tax if they trade one cryptocurrency for another, such as Bitcoin (BTC) for Ethereum (ETH). This disposal can result in a capital gain or loss, and the difference is calculated based on Bitcoin’s fair market value at the time of trading. The calculation involves subtracting BTC’s cost basis from the proceeds. ETH is acquired in the process, introducing a new cost basis based on its fair market value.

A Worked Example: Consider a scenario where a trader purchased 0.1 BTC in January 2024 for $4,000 and traded the same amount for 1.5 ETH in November 2024. Let’s also assume that BTC was worth $6,500 at the time of trading. Here are the facts:

• A BTC disposal occurred, with a taxable gain of $2,500 obtained by subtracting the $4,000 cost basis from $6,500.
•  Short-term ordinary income rates apply since the crypto was held for less than one year.
• $6,500 is the new ETH cost basis based on the fair market value price of the amount of ETH received.

The taxpayer must report the $2,500 gain in the tax year they swapped BTC for ETH.

DEX swaps involve swapping one digital asset for another on decentralised exchanges. The IRS treats this event as a property disposal. Therefore, such crypto transactions are subject to the same tax rules as trades on centralised platforms.

The Tracking Problem: Maintaining accurate records of DEX swaps is a notable challenge most traders face today. Centralised crypto exchanges help with record-keeping through 1099 tax forms. With DEX swaps taking place on-chain, traders are responsible for calculating the cost basis and gains, establishing the value of each digital asset in U.S. dollars. Manual calculation where hundreds of cryptocurrency transactions are involved can be a difficult task, even when using tax preparation software to speed up the process.

The 1099-DA Context: Some digital asset brokers help with crypto tax reporting through IRS Form 1099-DA. While DEX swap coverage is limited, the IRS may use analytics tools to track crypto transactions on the blockchain and go after individuals who do not report and pay taxes as required.

Note: While centralised platforms will issue Form 1099-DA in 2026 for transactions executed in 2025, non-custodial DEX swaps remain exempt from this broker reporting requirement for now, keeping the entire record-keeping burden solely on the individual trader.

If a trader acquires crypto at multiple price points and decides to sell a certain amount, they can utilise different cost basis methods to determine which purchase is considered sold and the capital gain subject to taxation.

The Three Methods

The three most used cost basis methods are:

• FIFO (First In, First Out): The first crypto acquired is also the first to be disposed of. Traders realise the highest tax gains if the market is rising.
• HIFO (Highest In, First Out): This method reduces the taxable gain, as the highest-value crypto is sold first. Accurate record-keeping is necessary for specific identification purposes whenever a trade occurs.
• Specific Identification: A flexible method that allows traders to select the specific coin they are selling. However, there must be a record showing the exact time a particular cryptocurrency was selected.

A Worked Example Showing the Difference

Let’s say a trader has acquired 1 BTC through two purchases as shown below.

• First Lot: Acquired 0.5 BTC for $20,000
• Second Lot: Acquired 0.5 BTC for $40,000

Here is what happens if the trader sells 0.5 BTC at $50,000 using different cost basis methods:

• FIFO Method: The first lot is sold, realising a $30,000 gain ($50,000 − $20,000).
• HIFO Method: The second lot is sold, realizing a $10,000 gain ($50,000 − $40,000).

Based on this example, the trader’s choice of cost basis method leads to a $20,000 difference in taxable gain.

Regardless of your investment objectives as a trader, it is important to comply with federal tax rules that apply to all crypto transactions. Noteworthy taxable events include trading one crypto for another, selling virtual currency for fiat currency, stablecoin trades, and DEX swaps. For legal or tax advice, consult a tax professional in your country.