If you bought, sold, traded, or even earned cryptocurrency in 2025, you owe taxes on it. The IRS doesn’t treat Bitcoin or Ethereum like cash. They treat them like stocks or real estate - as property. That means every time you sell, trade, or spend crypto, you could trigger a taxable event. And if you made a profit, you’ll pay capital gains tax. It’s not complicated if you know the rules. But if you don’t, you could end up paying way more than you should - or worse, getting flagged by the IRS.
How Crypto Capital Gains Work
The IRS has been clear since 2014: cryptocurrency is property, not currency. So when you sell Bitcoin for USD, trade Ethereum for Solana, or use Dogecoin to buy a laptop, you’re selling an asset. If you got more dollars back than you paid in, that’s a capital gain. If you got less, it’s a loss.
There are two types of capital gains: short-term and long-term. It all depends on how long you held the crypto before selling or trading it.
- Short-term capital gains: If you held the crypto for 365 days or less, your profit is taxed as ordinary income. That means it gets added to your other income - like your salary - and taxed at your regular federal rate, which in 2025 ranges from 10% to 37%.
- Long-term capital gains: If you held it for more than 365 days, you get a better rate. For 2025, the long-term rates are 0%, 15%, or 20%, depending on your taxable income.
For example, if you bought $5,000 worth of Ethereum in January 2024 and sold it for $8,000 in February 2025, you held it for 13 months. That’s long-term. If your taxable income is $70,000 as a single filer, your gain of $3,000 would be taxed at 15% - so $450 owed. But if you sold it in December 2024, just 11 months after buying, that same $3,000 gain would be taxed at your income rate - maybe 22%, or $660. That’s a $210 difference just because of timing.
What Triggers a Taxable Event
Not all crypto activity is taxable. But a lot more than people think is.
- Selling crypto for USD - taxable
- Trading one crypto for another - taxable (even if you didn’t get cash)
- Using crypto to buy goods or services - taxable (you’re selling crypto to pay for something)
- Receiving crypto as payment for work - taxed as ordinary income at fair market value on the day you received it
- Earning staking rewards or mining rewards - taxed as income when you receive them
- Receiving an airdrop - taxed as income at fair market value when you gain control of the tokens
- Buying crypto with USD - not taxable (you’re just acquiring an asset)
- Transferring crypto between your own wallets - not taxable
Here’s a real case: Someone bought 1 ETH for $2,000 in March 2024. In June 2025, they traded it for 0.08 BTC. At that moment, ETH was worth $3,500 and BTC was worth $43,750 per coin. Even though they didn’t get dollars, they still had a $1,500 capital gain. That’s taxable. People often forget this. They think, “I just swapped one coin for another - no cash involved.” But the IRS sees two sales: you sold ETH, then bought BTC.
2026 Reporting Rules Are Changing - Big Time
Starting January 1, 2026, crypto brokers like Coinbase, Kraken, and Binance.US must report your cost basis - not just the sale price - on Form 1099-DA. Before this, they only reported gross proceeds. Now, they’ll tell the IRS exactly how much you paid for each asset you sold.
This is a huge shift. Before, you had to track your own purchases across wallets, exchanges, and DeFi platforms. Now, for transactions on centralized exchanges, the IRS will have that data automatically. That doesn’t mean you’re off the hook. You still need to report everything on Form 8949 and Schedule D. But now, the IRS can cross-check your numbers against what the exchange reports. If your numbers don’t match, you’ll get a letter.
And here’s the catch: decentralized exchanges (DEXs) like Uniswap or PancakeSwap are not required to report anything. If you traded on a DEX or used a non-custodial wallet like MetaMask, you’re still responsible for tracking your own cost basis. That’s where most people get tripped up.
Cost Basis Methods Matter
How do you calculate your gain? It depends on which coins you sold - and which ones you bought first. The IRS lets you pick from four methods:
- FIFO (First-In-First-Out): The first coin you bought is the first one you’re considered to have sold. This is the default if you don’t choose anything else.
- LIFO (Last-In-First-Out): You sell the most recently bought coins first.
- HIFO (Highest-In-First-Out): You sell the most expensive coins first - this can reduce your taxable gain.
- Specific Identification: You pick exactly which coins you sold, with documentation.
Let’s say you bought 1 BTC in 2021 for $10,000, then another 1 BTC in 2023 for $45,000. In 2025, you sell 1 BTC for $60,000. If you use FIFO, your gain is $50,000 ($60,000 - $10,000). If you use HIFO, your gain is $15,000 ($60,000 - $45,000). That’s a $35,000 difference in taxable income.
Specific identification gives you the most control - but you need records. You must document which specific coins you sold, including transaction IDs, timestamps, and purchase prices. Most tax software supports this, but you have to set it up correctly.
Staking, Airdrops, and NFTs - The Weird Ones
Staking rewards? Taxable as income when you get them. Not when you sell them. So if you earned 0.5 ETH in staking rewards in June 2025 when ETH was worth $3,000, you report $1,500 as income. If you later sell that ETH for $4,000, you have a $2,500 capital gain.
Airdrops are the same. If you got 100 tokens for free in a project airdrop and they were worth $2 each when you received them, you report $200 as income. If you sell them later for $5 each, you have a $300 capital gain.
NFTs? They’re treated as collectibles. That means even if you held an NFT for 5 years, your long-term capital gains rate is capped at 28% - not 0%, 15%, or 20%. That’s a big deal if you made big profits.
What Happens If You Don’t Report
The IRS isn’t bluffing. In 2024, they hired 900 new agents trained in blockchain analysis. They’re using tools from Chainalysis and CipherTrace to trace transactions across public ledgers. They’ve already matched up 18.9 million crypto transactions from 2023 tax returns. That number is growing fast.
Penalties for underreporting can be steep: 20% accuracy-related penalty, 75% fraud penalty, or even criminal charges for willful evasion. And with Form 1099-DA now requiring cost basis reporting in 2026, the IRS will have a direct line to your exchange activity. If you didn’t report a $10,000 gain and they find it, you’ll owe taxes, interest, and penalties - all on top of the original tax.
Reddit users are sharing horror stories: one person lost $3,200 because their tax software didn’t include gas fees in the cost basis. Another paid $450 to fix a mistake that cost them $2,100 in overpaid taxes. These aren’t rare cases.
How to Stay Compliant
You don’t need to be an accountant. But you do need to be organized.
- Track every transaction: Write down the date, type (buy, sell, trade, reward), amount, and USD value at the time. Use a spreadsheet or a crypto tax tool.
- Know your cost basis: Use HIFO or specific identification if you want to minimize taxes. But document it.
- Use crypto tax software: Tools like CoinLedger, Koinly, or TokenTax connect to exchanges and wallets. They auto-calculate gains and losses. They cost $50-$400/year - way cheaper than an IRS audit.
- Report everything on Form 8949 and Schedule D: Even if you didn’t get a 1099-DA.
- Answer the crypto question on Form 1040: “At any time during 2025, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” - answer YES or NO. If you did anything, say YES.
- Keep records for 3 years: The IRS can audit you for up to 3 years after you file.
Pro tip: If you’re doing a lot of DeFi trades or NFT flips, use software that supports those. Most free tools won’t handle liquidity pool rewards or wrapped tokens correctly. The AICPA found widespread errors in how tax software handles these.
What’s Coming Next
President Biden’s 2025 budget proposal wants to apply the wash sale rule to crypto. That means if you sell a coin at a loss and buy it back within 30 days, you can’t claim the loss. This already exists for stocks. If it applies to crypto, it’ll make tax loss harvesting much harder.
By 2027, experts predict 92% of crypto transactions will be reported - up from just 28% in 2023. That’s because brokers are now forced to report. The IRS is also planning to integrate blockchain analytics into its automated audit system by late 2025. If you’re not compliant now, you’re playing Russian roulette.
Meanwhile, states are starting to weigh in. California and New York are considering their own crypto tax rules. Right now, federal rules apply - but that could change.
Bottom Line
Crypto taxes aren’t optional. They’re not a gray area. The IRS treats crypto like property - and they’re getting better at catching people who don’t report. The good news? You have tools, methods, and time to get it right. The bad news? Waiting until April 15 is a recipe for stress and surprise bills.
If you made any profit from crypto in 2025 - even a small one - you owe taxes on it. Figure out your cost basis. Pick your method. Use software. File correctly. Don’t guess. Don’t hope. Do the math. Because when the IRS comes knocking, they won’t ask if you meant to pay. They’ll just take what they think you owe - plus interest, penalties, and fees.
Do I pay capital gains tax if I lose money on crypto?
Yes, but you can use the loss to offset other gains. If you sold crypto at a loss, you can use that loss to reduce your taxable gains from other crypto sales or even from stocks. You can deduct up to $3,000 in net capital losses against your ordinary income each year. Any leftover losses can be carried forward to future years.
Do I owe tax if I just hold crypto and don’t sell?
No. Holding crypto without selling, trading, or spending it doesn’t trigger a taxable event. You only pay taxes when you dispose of it - meaning you sell it, trade it for another asset, or use it to buy something. Just sitting on it is tax-free.
Are gas fees part of the cost basis?
Yes. When you buy or trade crypto on a blockchain, the gas fee you pay in ETH or another token is part of your cost basis. For example, if you bought 1 ETH for $3,000 and paid $20 in gas fees, your total cost basis is $3,020. If you later sell it for $3,500, your gain is $480, not $500. Most tax software doesn’t auto-calculate this - you have to add it manually or use a tool that supports it.
Do I pay tax on crypto received as a gift?
You don’t pay tax when you receive crypto as a gift. But when you later sell it, you owe capital gains tax based on the original cost basis of the person who gave it to you. If they bought it for $1,000 and gifted it to you when it was worth $5,000, and you sell it for $6,000, your gain is $5,000 - not $1,000. You inherit their purchase history.
What if I forgot to report crypto from last year?
File an amended return using Form 1040-X. You can go back up to three years. The sooner you fix it, the less interest and penalties you’ll owe. The IRS has programs for voluntary disclosure - especially if you didn’t intentionally hide it. Don’t wait for them to find you.
Is mining crypto taxable?
Yes. When you mine crypto, you owe income tax on the fair market value of the coins you receive on the day you get them. For example, if you mined 0.1 BTC worth $5,000 on June 1, you report $5,000 as income. Later, if you sell that BTC for $6,000, you have a $1,000 capital gain. Mining also counts as self-employment income, so you may owe self-employment tax too.
If you're unsure about your crypto tax situation, don't wing it. Use a trusted tax tool, talk to a CPA familiar with crypto, or at least document everything. The cost of getting it wrong is far higher than the cost of getting it right.