How digital assets are taxed, in plain language

The IRS taxes cryptocurrency as property, not currency. Selling a digital asset, trading one for another, or spending it is a taxable event that produces capital gain or loss, and rewards from staking, mining, or getting paid in crypto are ordinary income. Here are direct answers to the questions taxpayers and practitioners ask us most.

Questions and answers

Is cryptocurrency taxed like currency?

No. The IRS treats digital assets as property. Every sale, trade, or use of a digital asset to buy something is a disposition of property, and each disposition is a taxable event requiring you to calculate gain or loss. That has been the rule since Notice 2014-21, and it drives nearly every question below.

Spending crypto on a cup of coffee is, under current law, the same as selling stock and using the cash.

The property classification dates to Notice 2014-21 and is restated on the IRS’s digital assets page. It reaches further than many people expect: Form 1040 now asks every filer, “At any time during the tax year, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?” The question sits on the front of the main form, and everyone answers it — crypto owner or not.

Do I owe tax if I only bought and held crypto this year?

Generally no. Buying digital assets with U.S. dollars and holding them is not a taxable event, and neither is moving assets between wallets you own. Tax attaches when you dispose of the asset by selling, trading, or spending it. You must still answer the digital asset question on Form 1040 accurately.

The non-events, per the IRS: purchasing digital assets with cash, holding them while they appreciate, and transferring them between wallets or accounts you control. One edge case catches people — if you pay a transfer fee in crypto, the units used to pay the fee are themselves disposed of, and that small disposition is reportable.

Is trading one cryptocurrency for another taxable?

Yes. Exchanging one digital asset for another — bitcoin for ether, or any token for a stablecoin — is a disposition of the asset you give up, so gain or loss must be calculated even though no dollars ever reached your bank account. Like-kind deferral is unavailable: section 1031 has been limited to real property since 2018.

A worked example: you bought 1 ETH for $2,000. Later, when it is worth $2,600, you trade it for a stablecoin. No cash arrived, but you have a $600 capital gain to report, and your basis in the stablecoin is $2,600. Had ETH fallen to $1,500 before the trade, the same swap would have produced a $500 capital loss. Some taxpayers once argued crypto-to-crypto swaps qualified as like-kind exchanges; the Tax Cuts and Jobs Act ended that argument by restricting section 1031 to real property for exchanges after 2017.

The IRS’s digital assets page sorts the common events this way:

Why do small transactions cause so much trouble?

Because there is no de minimis exception. Securities law and foreign currency rules contain thresholds below which small gains are ignored, but digital assets have none. A person who makes dozens of small purchases with crypto must track and report gain or loss on every one.

Policymakers have debated a de minimis exemption for years; some argue it would make everyday use practical and reduce needless reporting, while others worry about creating avenues for abuse. Congress has not enacted one, so full tracking remains the law. Until that changes, every disposition — however small — belongs on your return at the rates described in our guide to crypto tax rates for 2026.

How are staking and mining rewards taxed?

As ordinary income, not capital gain. Under Rev. Rul. 2023-14, staking rewards are included in gross income at their fair market value as of the moment you gain dominion and control over them, and Notice 2014-21 applies the same rule to mined coins. That value then becomes your cost basis in the new units.

A worked example: you receive two reward tokens on a day when each is worth $75, and you can sell them immediately. You report $150 of ordinary income for that year, and your basis in the tokens is $150. Sell them later for $210 and you have a $60 capital gain; sell for $100 and you have a $50 capital loss — but the $150 of income was still taxable in the year you received it, even if the tokens later collapse. The ruling itself, Rev. Rul. 2023-14, is six pages and unusually plain.

How much tax will I pay on crypto gains?

It depends on your income and how long you held the asset. Gains on digital assets held more than one year are taxed at the long-term capital gains rates of 0, 15, or 20 percent. Assets held one year or less produce short-term gains, which are taxed as ordinary income at regular bracket rates.

Income-type events — staking and mining rewards, getting paid in crypto — are ordinary income no matter how long you go on to hold what you received; the holding-period clock for the capital gains rates starts once the asset is yours. The IRS summarizes the capital gains structure at Topic No. 409, and our 2026 rates guide applies it to digital assets with the current brackets and worked examples.

Can I deduct crypto losses?

Generally yes, once they are realized. Capital losses on digital assets first offset capital gains; up to $3,000 of any excess ($1,500 if married filing separately) is deductible against ordinary income each year, and the remainder carries forward. An asset that has merely fallen in value produces no deduction until you dispose of it.

The follow-up we hear constantly is about the wash-sale rule. Section 1091 disallows a loss on “shares of stock or securities” sold and repurchased within thirty days; the statute does not mention digital assets, which the IRS treats as property. Anyone planning around that gap should confirm the state of the law when they act — the rules in this area keep moving. And a loss because your crypto was stolen is not a capital loss from a sale at all; that regime is covered in the next answer.

Will the IRS know about my trades?

Increasingly, yes. Brokers must report gross proceeds from digital asset sales effected on or after January 1, 2025 to the IRS on Form 1099-DA, with basis reporting added for certain transactions on or after January 1, 2026. The IRS matches information returns against filed returns, which is how CP2000 notices are generated.

The regime comes from the 2024 final broker regulations under section 6045, phased in with penalty relief for brokers making good-faith efforts in the first year. Expect the early forms to be incomplete: assets bought before 2026 or moved between platforms will often show missing or unreliable basis, while the IRS sees the full proceeds either way — the exact mismatch that generates a CP2000 notice for crypto. Our Form 1099-DA guide explains what the form captures, what it misses, and why your own records still control.

What happens if my crypto is stolen or I am scammed?

Under current law, most individual victims get no deduction. The Tax Cuts and Jobs Act suspended the personal theft loss deduction except for losses in federally declared disasters, and the One Big Beautiful Bill Act (P.L. 119-21, signed July 4, 2025) made that suspension permanent. Losses from investment scams remain deductible only in narrow, fact-dependent circumstances.

The dividing line is profit motive. In Chief Counsel Advice 202511015 (released March 2025), the IRS concluded that a victim who entered the transaction seeking profit — a fake investment platform, for example — may still deduct the theft loss under section 165(c)(2), while the victim of a purely personal scam generally cannot. Our guide to taxes after a scam works through the scenarios and what victims should document now. In Congress, the Tax Relief for Fraud Victims Act (H.R. 9500), which would restore the theft loss deduction for fraud victims, was approved by the House Ways and Means Committee 39–0 on July 1, 2026; it has not become law.

Whether and how Congress should change this is an active policy debate. Our affiliate, Digital Asset Tax Advocacy, has taken a position on pending legislation; you can read about its work on its section of this website.

I have unreported crypto from past years. What are my options under current law?

The IRS operates a general voluntary disclosure practice for taxpayers with willful noncompliance and expects non-willful errors to be corrected through amended returns. There is no program tailored to digital assets, no standardized penalty framework for crypto disclosures, and considerable uncertainty about outcomes — which practitioners widely report discourages taxpayers from coming forward.

Willfulness is the fork in the road. The IRS Criminal Investigation voluntary disclosure practice is built for willful conduct: it requires truthful, complete disclosure before the IRS comes to you, full cooperation, and payment or a full-pay arrangement. Non-willful mistakes are ordinarily fixed by amending past returns. Which path fits is a judgment to make with a professional — our guide to unreported crypto lays out the current-law menu and why your records come first.

Whether the IRS should create a dedicated digital asset disclosure program is likewise a live policy question. Our affiliate has taken a position on that question as well, described on its section of this website.

What should I do if I get an IRS letter about crypto?

Identify which letter you received before doing anything else, because the obligations differ sharply. Letter 6173 requires a response signed under penalties of perjury. Letters 6174 and 6174-A are educational and require no response. A CP2000 notice proposes a specific adjustment that you must accept or dispute by its deadline. None should be ignored.

Our IRS letter decoder compares the three side by side, with dedicated guides to Letter 6173, Letter 6174, and crypto CP2000 notices. The IRS’s own CP2000 page confirms the notice is a proposal, not a bill — but one with a reply-by date that matters.

Common mistakes to avoid

• Guessing on the Form 1040 digital asset question. Every filer answers it, and the return is signed under penalties of perjury.
• Assuming an exchange’s year-end report is complete. Transfers between platforms routinely break basis tracking; reconcile against your own records.
• Treating crypto-to-crypto swaps, or purchases made with crypto, as tax-free.
• Waiting for a letter before addressing unreported years. The voluntary disclosure practice is available only before the IRS comes to you.
• Discarding records. Dates, amounts, wallet addresses, and dollar values at the time of each transaction are the foundation of every answer above.

This page is educational and does not constitute tax or legal advice for your specific situation. For questions about your own filings, consult a qualified tax professional.

Last reviewed July 30, 2026 · Reviewed by Andrew Gordon, JD, CPA