How Capital Gains Tax Works on Cryptocurrency Sales

The tax on crypto gains depends on how long you held it before selling

When you sell cryptocurrency for more than you paid for it, the profit is a capital gain and is taxed as income by the IRS. The tax rate you pay depends on two things: your income bracket and how long you owned the crypto before selling it. If you held it for less than one year, it's taxed as a short-term capital gain at your ordinary income tax rate — the same rate as your salary or wages. If you held it for one year or longer, it's taxed as a long-term capital gain at a lower rate: 0%, 15%, or 20%, depending on your total income for the year.

The IRS treats crypto as property, not currency. That means every transaction where you sell, trade, or exchange crypto for something else — including trading one coin for another — creates a taxable event. Even if you never convert crypto to dollars, you owe tax on the gain. The amount of tax you owe is based on the difference between what you paid for the crypto (your cost basis) and what it was worth when you sold it (the sale price).

Key Takeaways

• Short-term capital gains on crypto held less than one year are taxed at your ordinary income tax rate, which ranges from 10% to 37% depending on your income.
• Long-term capital gains on crypto held one year or longer are taxed at 0%, 15%, or 20% depending on your total income, which is lower than short-term rates.
• Every sale, trade, or exchange of crypto creates a taxable event, even if you trade one coin for another without touching dollars.
• You report crypto gains on Schedule D (Form 1040) when you file your tax return, and the IRS receives transaction records from exchanges.

Short-term capital gains: crypto you sold within one year

If you bought crypto and sold it within 12 months, the gain is a short-term capital gain. The IRS taxes this at your ordinary income tax rate — the same bracket you fall into based on your total income for the year. For 2024, those rates range from 10% to 37% depending on your filing status and income level.

For example, if you bought Bitcoin for $20,000 and sold it for $25,000 six months later, your gain is $5,000. If you're in the 24% tax bracket, you owe $1,200 in federal tax on that gain (before any state taxes). The short-term rate applies even if you held the crypto for 11 months and 29 days — the one-year threshold is strict.

Long-term capital gains: crypto you held for one year or more

If you held crypto for at least one year before selling, the gain is a long-term capital gain and receives preferential tax treatment. Instead of your ordinary income rate, you pay 0%, 15%, or 20% depending on your total income for the year. These rates are significantly lower than short-term rates for most people.

The 0% rate applies to lower-income filers. The 15% rate applies to most middle-income filers. The 20% rate applies to high-income filers. The exact income thresholds change each year. For 2024, the 15% rate applies to single filers with income between roughly $47,000 and $518,000, but you should check the current year's IRS tables for your filing status. The holding period starts the day after you buy the crypto and ends the day you sell it.

How the IRS tracks your crypto transactions

Cryptocurrency exchanges report your transactions to the IRS using Form 8949 information. Major exchanges like Coinbase, Kraken, and others send records to the IRS when you sell crypto or convert it to dollars. The IRS receives your name, the amount sold, the sale price, and the date. If you trade crypto on a decentralized exchange or move coins between wallets, those transactions may not be automatically reported, but you are still required to report them on your tax return.

The IRS matches exchange reports against your tax return. If you don't report a gain that the exchange reported, the IRS will likely send you a notice. If you use multiple exchanges or move crypto between wallets, you're responsible for tracking all transactions and calculating your total gains. Many people use crypto tax software to import transaction history and calculate gains automatically, though this is not required — you can calculate it manually if you keep detailed records.

Calculating your cost basis and gain

Your cost basis is what you paid for the crypto, including any fees. Your gain is the sale price minus the cost basis. If you bought 1 Bitcoin for $30,000 plus a $100 exchange fee, your cost basis is $30,100. If you sold it for $45,000, your gain is $14,900.

When you've bought crypto multiple times at different prices, you need to decide which coins you're selling. The IRS allows three methods: first-in-first-out (FIFO), specific identification, or average cost. FIFO assumes you sell the oldest coins first. Specific identification lets you choose which purchase lot to sell, which can minimize your gain. Average cost divides your total cost by the number of coins. The method you choose affects how much tax you owe, so many people use specific identification to reduce gains. You must pick a method and stick with it for consistency.

Reporting crypto gains on your tax return

You report capital gains on Schedule D (Form 1040), which is part of your federal tax return. Short-term gains go in Part I, long-term gains in Part II. You list each transaction: the date acquired, date sold, cost basis, sale price, and gain or loss. If you have many transactions, you can attach Form 8949 (Sales of Capital Assets) to show the details, then summarize the totals on Schedule D.

The net total from Schedule D flows to your Form 1040. If your gains exceed your losses, the net gain is added to your income. If your losses exceed your gains, you can deduct up to $3,000 of the net loss against other income in that year, and carry forward any remaining loss to future years. State taxes on crypto gains vary by state — some states tax capital gains at ordinary income rates, others have special rates, and a few have no capital gains tax at all.

Losses and how they reduce your tax bill

If you sold crypto for less than you paid for it, you have a capital loss. You can use losses to offset gains. If you had $10,000 in gains and $3,000 in losses, your net gain is $7,000 and you pay tax only on that amount. If your losses exceed your gains in a year, you can deduct up to $3,000 of the excess loss against your other income (wages, interest, dividends, and so on).

Any loss beyond $3,000 carries forward to the next year. If you had $15,000 in losses and only $5,000 in gains, you can deduct $3,000 against other income this year and carry forward $7,000 to next year. This is why some people harvest losses by selling crypto at a loss late in the year — it reduces their tax bill. However, the IRS has a wash-sale rule for stocks and mutual funds that prevents you from buying back the same asset within 30 days and claiming the loss. Crypto does not have an official wash-sale rule yet, but the IRS has indicated it may explore one in the future, so it's safer to assume it could.

Frequently Asked Questions

Do I owe tax if I trade one crypto for another without converting to dollars?

Yes. Trading one coin for another is a taxable event. If you trade Ethereum for Bitcoin and the Bitcoin is worth more than what you paid for the Ethereum, you owe tax on the gain. The IRS treats this as a sale of the Ethereum and a purchase of the Bitcoin, even though no dollars changed hands.

What if I lost money on my crypto investment?

You can use the loss to offset other capital gains. If you have no gains, you can deduct up to $3,000 of the loss against your wages or other income. Any loss over $3,000 carries forward to future years. Keep records of the purchase and sale price to prove the loss.

Do I owe tax on crypto I'm holding but haven't sold?

No. The IRS taxes only realized gains — when you actually sell or trade the crypto. If you buy Bitcoin and hold it, you owe no tax until you sell it, even if the price goes up. Unrealized gains are not taxed.

How do I know my cost basis if I've lost my purchase records?

If your exchange still has records, you can read your transaction history. If the exchange is gone or records are unavailable, you can reconstruct cost basis using blockchain records or exchange APIs. If you cannot determine it, the IRS may assume your cost basis is zero, which means your entire sale price is taxable gain. Keeping records is much easier than reconstructing them later.

Is there a difference between buying crypto and mining or receiving it as a gift?

Yes. When you receive crypto through mining, staking rewards, or as a gift, the tax treatment differs. Mining and staking are taxed as ordinary income at the fair market value on the day you received it. A gift is not taxed when received, but your cost basis becomes the donor's cost basis, so you inherit their tax position. Selling any of these later triggers capital gains tax on the difference between your cost basis and the sale price.