Crypto Taxation in United States

What does the IRS say crypto is for tax purposes?

The Internal Revenue Service first published guidance on the federal tax treatment of virtual currency in Notice 2014-21 [SC1]. The notice states that virtual currency is treated as property for US federal income tax purposes, not as currency. The classification carries through every downstream calculation: gain or loss on the disposition of crypto is computed the same way as gain or loss on the sale of stock or other capital property, holding-period rules determine long-term versus short-term character, and basis is tracked at the per-unit level.

The IRS subsequently issued Rev. Rul. 2019-24 to address hard forks and airdrops [SC2], FAQ guidance in 2019 and 2020 to address questions on receipt of crypto as compensation and on cost-basis methods, and Notice 2023-34 to clarify treatment of certain non-fungible token transactions. The Inflation Reduction Act of 2022 and the Infrastructure Investment and Jobs Act of 2021 directed Treasury to write broker-reporting regulations for digital assets; those final regulations (TD 10000) took effect for the 2025 tax year and introduced Form 1099-DA [SC3].

The classification of crypto as property carries one consequence many filers find counterintuitive: paying for goods or services with crypto is a disposition of the crypto and a taxable event. A filer who pays for a USD 5 cup of coffee with bitcoin acquired years earlier for USD 0.10 of basis realizes USD 4.90 of capital gain on the coffee purchase. The merchant who receives the bitcoin records ordinary income of USD 5 (or, if held as inventory, USD 5 of revenue with a corresponding USD 5 cost basis carrying forward).

What counts as a taxable event with crypto?

Taxable dispositions of crypto include the following categories under current IRS guidance [SC1]:

• Sale for fiat currency: Selling crypto for US dollars (or foreign fiat) is a taxable disposition. Gain or loss equals proceeds minus adjusted basis.
• Exchange for another cryptocurrency: A swap of Bitcoin for Ethereum is treated as a sale of the Bitcoin (gain or loss recognized) followed by a purchase of the Ethereum at the same fair market value (which becomes the new basis). Pre-2018 like-kind exchange treatment under IRC §1031 was sometimes argued for crypto-to-crypto swaps; the Tax Cuts and Jobs Act of 2017 narrowed §1031 to real property only, foreclosing that position prospectively.
• Payment for goods or services: Using crypto to pay a vendor is a disposition.
• Receipt of crypto as compensation: Wages or self-employment income paid in crypto are taxed as ordinary income at fair market value on receipt; the FMV becomes basis for the recipient.
• Mining rewards: Newly-minted crypto received as a mining reward is ordinary income at FMV on receipt. Self-employment tax may apply if the activity rises to the level of a trade or business under the Section 162 framework.
• Staking rewards: Crypto received from staking is ordinary income on receipt. The IRS clarified in Rev. Rul. 2023-14 that the income-recognition event is the moment the staker has dominion and control over the reward, even if the reward is locked or subject to slashing.
• Hard-fork airdrops: When a hard fork results in the creation of a new cryptocurrency and the holder of the original receives the new currency, ordinary income is recognized at the FMV of the new currency on the date the holder gains dominion and control [SC2].
• DeFi liquidity provision and yield farming: Generally treated as taxable events on a transaction-by-transaction basis. Deposit of crypto into a liquidity pool, receipt of LP tokens, and removal of liquidity each carry potential tax consequences. The IRS has not issued comprehensive DeFi guidance; practitioners cite a mix of general principles to allocate.

Non-taxable events include the purchase of crypto with fiat (no gain or loss until disposition), wallet-to-wallet transfers between the same beneficial owner, and gifting crypto below the annual gift-tax exclusion (USD 19,000 per recipient for 2025) — although the recipient takes the donor's basis under IRC §1015 and the donor's holding period tacks.

How are short-term and long-term holding periods computed?

Holding period for crypto follows the same IRC §1223 rules as for any other capital asset: the period begins the day after acquisition and ends on the date of disposition [SC1]. Crypto held for one year or less generates short-term gain or loss taxed at ordinary marginal rates (10 to 37 percent for 2025). Crypto held more than one year generates long-term gain or loss eligible for the 0, 15, or 20 percent preferential rates that apply to long-term capital gains generally (see Capital gains tax in the United States for the bracket detail).

Lot-selection method determines which specific units are deemed sold when only a partial position is disposed of. The IRS permits two methods: specific identification, in which the filer chooses specific lots to sell (typically the highest-basis lots first to minimize gain — known as HIFO, the highest-in-first-out variant of specific ID), and first-in-first-out (FIFO), the default when specific identification is not used. Treasury final regulations TD 10000 require taxpayers to designate the lot at or before the time of sale to substantiate specific identification, and broker reporting on Form 1099-DA from 2025 forward defaults to FIFO if no per-transaction designation is on file [SC3].

The wash-sale rules of IRC §1091 historically did not apply to crypto because crypto is not a security. Multiple legislative proposals (notably in the Build Back Better drafts) would have extended wash-sale rules to crypto, but none have been enacted as of mid-2026. The IRS has signaled informally that it views substantially-identical crypto-to-crypto swaps as potentially eligible for wash-sale treatment, but there is no current statutory hook. For now, a filer who sells a position at a loss and immediately repurchases the same crypto generally claims the loss without disallowance — a posture different from equities.

How are mining, staking, and airdrop rewards taxed?

Mining rewards are ordinary income at the FMV of the mined crypto on the date received [SC1]. If the activity is a trade or business, self-employment tax applies on the net earnings; if it is a hobby, no SE tax applies but expenses are non-deductible after the Tax Cuts and Jobs Act removed miscellaneous itemized deductions. The trade-or-business test under IRC §183 looks at regularity, continuity, profit motive, and the manner in which the activity is carried on — a question of facts and circumstances that practitioners frequently route to a credentialed tax pro.

Staking rewards are ordinary income at FMV on the date of dominion and control under Rev. Rul. 2023-14. Many staking protocols restrict redemption for a fixed period after reward distribution; the IRS position is that the income recognition does not wait for the restriction to lift, although a contrary court-of-claims decision (Jarrett v. United States, then mooted by an IRS refund) has been cited by some commentators arguing for deferred recognition. The IRS posture as of 2026 is the receipt-on-control rule.

Hard-fork airdrops follow Rev. Rul. 2019-24: ordinary income at FMV on the date the holder of the original crypto gains dominion and control over the new crypto resulting from the fork [SC2]. Airdrops unrelated to a hard fork (promotional drops by a new project) are typically taxed as ordinary income on receipt under general accession-to-wealth principles. The recipient's basis in the new crypto equals the FMV recognized as income; subsequent disposition triggers gain or loss measured against that basis.

For a self-employed crypto trader filing on Schedule C, gross receipts include mining and staking and airdrop FMV at receipt plus capital gains from dispositions. Expenses deductible against that income include electricity, depreciation on mining hardware (with bonus depreciation availability under IRC §168(k) at 40 percent for 2025 and phasing out), transaction fees, and any portion of home use that qualifies for the home-office deduction under IRC §280A. The full deduction stack for self-employed filers is covered in the Self-employed tax crossover.

What is Form 1099-DA and when does it appear?

Form 1099-DA (Digital Asset Proceeds From Broker Transactions) is the broker-issued information return that reports digital-asset dispositions, modeled on Form 1099-B for traditional securities [SC3]. Treasury issued final regulations TD 10000 in mid-2024 finalizing the broker-reporting framework. The phase-in calendar is:

• Tax year 2025: Brokers begin issuing Form 1099-DA for gross proceeds on dispositions. Cost basis reporting is optional this first year and required from a later phase. The first 1099-DA forms reach recipients in January 2026.
• Tax year 2026: Cost basis becomes mandatory on broker-issued 1099-DAs for assets acquired through the broker.
• Decentralized-finance protocols: The DeFi broker definition was finalized then withdrawn in early 2025 under the regulatory pause; legislative and regulatory status remains in flux as of mid-2026.

Filers receive a Form 1099-DA from each broker (centralized exchange, custodial wallet provider, NFT marketplace) on which they had dispositions during the year. Each disposition is reported with the asset description, acquisition date (if known), disposition date, gross proceeds, and (from 2026) cost basis. Discrepancies between the filer's records and the broker's report — typical when assets moved between wallets or across exchanges — are reconciled on Form 8949 with adjustment codes documenting the basis correction.

The Form 1040 digital-asset question is answered Yes or No by every filer regardless of whether the filer had taxable activity. The question reads, for 2025: "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)?" A Yes triggers detail reporting on Form 8949 and Schedule D for dispositions or on Schedule 1 / Schedule C / Schedule E for income.

How are NFTs taxed under US rules?

Non-fungible tokens are digital assets under the IRC §6045 definition expanded by the Infrastructure Act, and follow the property classification under Notice 2014-21 [SC1]. Sale of an NFT for fiat or crypto is a taxable disposition. Long-term versus short-term character follows the holding-period rules. The wrinkle is whether a particular NFT qualifies as a collectible under IRC §408(m)(2), which would subject the long-term gain to the maximum 28 percent collectibles rate rather than the standard 20 percent long-term rate.

Notice 2023-34 introduced a "look-through" analysis: an NFT is treated as a collectible if its underlying associated asset is a collectible under §408(m)(2). An NFT representing a work of digital art is a collectible. An NFT representing membership in an online club without a tangible underlying collectible is likely not, subject to facts and circumstances. The IRS has signaled additional NFT guidance is coming; practitioners track future revenue rulings on this point.

The creator of an NFT recognizes ordinary income on the primary sale (or self-employment income if the creator is engaged in a trade or business). Royalties paid to the creator on secondary-market sales — a common smart-contract feature — are ordinary income to the creator at FMV on receipt. The buyer-side gain or loss on a later resale of the NFT is the buyer's capital gain or loss measured against the buyer's basis (purchase price plus any associated transaction fees).

DeFi: lending, liquidity, yield farming, governance tokens

DeFi taxation operates under general crypto principles because specific guidance is sparse. Practitioner consensus (subject to change as IRS guidance evolves) treats the major DeFi categories as follows:

• Lending to a protocol (e.g., depositing USDC into Aave or Compound): A deposit that mints an interest-bearing token (aUSDC, cUSDC) may be a taxable exchange. The accrued interest is ordinary income as it accrues or on withdrawal, depending on the protocol's mechanics. Withdrawal of the principal is a disposition of the interest-bearing token.
• Liquidity pool provision (e.g., Uniswap LP): Depositing two assets into a pool and receiving LP tokens is generally treated as a disposition of the two assets in exchange for the LP token. Removal of liquidity is the reverse: a disposition of the LP token in exchange for the underlying assets. Impermanent loss is realized at the time of removal.
• Yield farming: Each new token received as a yield reward is ordinary income at FMV on receipt. Each subsequent disposition of that reward token is a capital event.
• Governance token receipt: Often treated as ordinary income on receipt, with basis equal to the FMV recognized.
• Token swaps via DEX: A taxable disposition of the input token and acquisition of the output token at FMV.

Gas fees paid in crypto for transactions are themselves potential dispositions of the gas-paying crypto. Capitalization versus deduction of gas depends on the underlying transaction: gas paid to acquire a long-term investment can be capitalized into basis; gas paid in a trade or business context is generally deductible. The DeFi tax-software tooling category (CoinTracking, Koinly, TokenTax, ZenLedger) has emerged in part because manual reconciliation across multiple chains, wallets, and protocols is impractical at scale.

FBAR, FATCA, and foreign-held crypto reporting

FBAR (FinCEN Form 114) reporting historically did not extend to crypto held on a foreign exchange because FinCEN had not designated foreign virtual-currency exchanges as reportable accounts. FinCEN issued a Notice 2020-2 indicating intent to amend the FBAR regulations to include foreign crypto accounts, but as of mid-2026 the final amendment has not been promulgated. Conservative practitioner posture is to file FBAR for foreign-exchange-held crypto when aggregate balances across reportable accounts exceed USD 10,000 at any point during the year; the cost of an over-inclusive FBAR is low (no tax owed; only a disclosure), while the cost of a missed FBAR is high (USD 10,000-plus non-wilful penalty, up to USD 161,000 or 50 percent of account balance for wilful violations) [SC4].

Form 8938 reporting (Statement of Specified Foreign Financial Assets) is statutorily broader than FBAR and explicitly includes "any financial instrument or contract held for investment that has an issuer or counterparty that is not a US person." Crypto held in a foreign-issued account is likely a specified foreign financial asset; native crypto on a self-custody wallet probably is not (no issuer or counterparty). The Form 8938 threshold is significantly higher than FBAR — USD 50,000 single / USD 100,000 MFJ at year-end (or USD 75,000 / USD 150,000 at any point during the year) for single-and-resident-in-US filers — and rises to USD 200,000 / USD 400,000 for filers living abroad.

US-person status carries the worldwide-income obligation; an expat US citizen holding crypto on a foreign exchange owes US tax on US-source and foreign-source crypto income alike. The Foreign Tax Credit under IRC §901 mitigates double taxation when the foreign jurisdiction also taxes the same crypto income. The interaction is covered in the Expat tax residency crossover. Filers managing fiat-to-crypto conversions through multi-currency accounts may use WorldFirst for the fiat side of cross-border transfers.

Reporting crypto: forms, schedules, and the Form 1040 question

Digital-asset dispositions are reported on Form 8949 (Part I for short-term, Part II for long-term) with totals rolling to Schedule D and then to Form 1040 [SC5]. Each disposition shows the asset, acquisition date, disposition date, proceeds, and cost basis, with adjustment codes for any basis correction. From 2025, broker-reported dispositions on Form 1099-DA flow through Form 8949 with appropriate Box-A/B/C designation (basis reported to IRS, not reported, or no 1099-DA at all).

Crypto income from mining, staking, airdrops, or compensation flows through different schedules: Schedule C for self-employed mining or staking businesses; Schedule 1 (Additional Income) for hobby-level mining or staking; Form W-2 wages box 1 for crypto received as employer compensation (with FICA and federal income tax withheld at the FMV); Schedule E for crypto held through a partnership or S corporation entity.

The Form 1040 digital-asset question on Page 1 is answered Yes or No on every return. "No" is correct for filers who only held crypto (no taxable events) and did not receive crypto as a reward, payment, or compensation. "Yes" is correct for filers who had any disposition or receipt event. The IRS treats a wrong answer as a misrepresentation that could be referenced in subsequent compliance proceedings, so accurate response matters even when no tax is owed. Practitioners managing 1099-NEC issuance for crypto-paid contractors often use Tax1099 for e-filing.

For a complete picture of how US crypto rules connect to the rest of the federal tax stack, see the Capital gains tax in the United States crossover for the long-term rate brackets, Self-employed tax for the Schedule C treatment of mining and staking businesses, Expat tax residency for the cross-border interaction, and the US federal tax overview for the full stack. The Crypto tax topic hub compares US treatment with other jurisdictions. To find a credentialed practitioner who handles crypto returns, browse the US tax-pros directory.