US Crypto Tax Rules Explained: Every Trade Is a Taxable Event

The IRS treats cryptocurrency as property, not currency. That single classification drives nearly every rule that follows. Because it is property, each disposal is a taxable event that produces a capital gain or loss measured against your cost basis, and the holding period determines whether the gain is short-term at ordinary rates or long-term at the preferential 0, 15 or 20 per cent rates.

Disposals are broader than most holders assume. Selling for dollars is obvious. Swapping one token for another is also a disposal of the first token at fair market value. Spending crypto on goods or services is a disposal. Paying a contractor in crypto is both a disposal and a deductible business expense. Bridging, wrapping and certain liquidity pool transactions may be disposals depending on the mechanics. Simply buying and holding, or moving assets between wallets you control, is not.

Income events are taxed differently from disposals. Mining rewards, staking rewards, airdrops and crypto received as payment for work are ordinary income at fair market value on the date you gain control of them. That value then becomes your basis, so a later sale produces a capital gain or loss on the movement since receipt. Mining as a trade or business also attracts self-employment tax and allows deduction of equipment and electricity.

Basis tracking is where most taxpayers come unstuck. Every acquisition needs a date, quantity and dollar value including fees. Identification methods matter: specific identification allows you to choose which units you sold if your records support it, and recent rules require tracking on a per-wallet or per-account basis rather than pooling everything universally. Reconstructing five years of activity across four exchanges and two self-custody wallets is the single most expensive mistake in this area, and specialist software that ingests exchange APIs and on-chain addresses is worth its cost.

Losses are usable and, historically, unusually flexible. Capital losses offset capital gains and up to $3,000 of ordinary income annually, with the rest carried forward. The wash sale rule has applied to securities rather than property, though legislative proposals to extend it to digital assets recur — so check the current position before relying on a quick repurchase. Worthless or abandoned tokens and losses from exchange failures are treated under their own, less generous rules and usually require a clear abandonment or a documented theft.

Reporting has become stricter. The digital asset question on the front of Form 1040 must be answered honestly; ticking no while transacting is a discrete misstatement quite apart from any unpaid tax. Disposals are reported on Form 8949 and Schedule D. Brokers and exchanges now issue Form 1099-DA style reporting, which means the IRS receives its own version of your activity, and mismatches generate automated notices.

DeFi and NFTs deserve extra care. Lending, yield farming and liquidity provision can produce both income and disposals within a single transaction, and the treatment of some structures remains genuinely unsettled. NFTs are property, may be collectibles subject to the 28 per cent rate in some cases, and gas fees generally form part of basis or reduce proceeds. Where the law is unclear, adopt a defensible and consistent position and document the reasoning.

Practical habits make all of this tractable. Use one portfolio tracker from the beginning, export transaction history from every exchange annually before accounts close or platforms fail, label wallet transfers so they are not read as sales, and set aside tax on gains when you realise them rather than when you cash out. Crypto tax problems are almost always record-keeping problems rather than rate problems.