Cryptocurrency Taxation: Capital Gains, Mining, and Reporting Rules

Property, Not Currency: The IRS Classification That Changes Everything

When the IRS published Notice 2014-21, it established a position that continues to shape how millions of Americans file their taxes: cryptocurrency is property, not currency. That single classification means every time a taxpayer sells, trades, or spends crypto, a taxable event occurs — even if the transaction took place within a crypto exchange and no U.S. dollars ever changed hands.

How Capital Gains Apply to Crypto

Because the IRS treats crypto as property, the capital gains rules that apply to stocks also apply to digital assets. The tax owed depends on how long the asset was held and the taxpayer's income level.

The gain or loss is calculated from the asset's cost basis — the price paid for the crypto, including any fees — to the proceeds received at sale. Accurate record-keeping of every transaction, including the date, amount, and USD value at acquisition, is legally required.

What Counts as a Taxable Event

Many crypto investors underestimate the scope of taxable events. The following transactions all trigger potential tax liability.

• Selling crypto for USD or other fiat currency — the most straightforward taxable event
• Trading one cryptocurrency for another — exchanging Bitcoin for Ethereum is treated as a sale of Bitcoin at its current market value
• Purchasing goods or services with crypto — spending Bitcoin at a merchant triggers a capital gain or loss on the crypto used
• Receiving crypto as payment for services — taxed as ordinary income at the fair market value on the date received
• Mining rewards — taxed as ordinary income when received, then subject to capital gains when sold
• Staking rewards — the IRS guidance (Revenue Ruling 2023-14) confirms staking rewards are ordinary income when received

Transactions that are not taxable events include buying crypto with USD (no gain yet), transferring crypto between your own wallets, and gifting crypto up to the annual gift tax exclusion ($18,000 per recipient in 2024).

Mining and Staking: Income First, Capital Gains Second

Crypto miners who receive block rewards face a two-step tax consequence. At the moment of receipt, the fair market value of the newly mined coins is ordinary income. If the miner later sells those coins, any further appreciation from the income-recognition date is subject to capital gains tax.

For miners operating as businesses (regularly and continuously, with profit motive), expenses such as electricity, hardware depreciation, and facility costs are deductible against mining income on Schedule C. The resulting net self-employment income is subject to self-employment tax at 15.3% up to the Social Security wage base. Hobbyist miners, by contrast, cannot deduct losses against other income.

Cost Basis Methods

When selling part of a crypto holding acquired at multiple prices, taxpayers must choose a cost basis accounting method. The IRS allows several approaches for digital assets.

• First-In, First-Out (FIFO) — the default method; oldest coins are considered sold first
• Last-In, First-Out (LIFO) — newest coins sold first; may reduce short-term gains in rising markets
• Highest-In, First-Out (HIFO) — sells the highest-cost coins first, minimizing realized gains
• Specific Identification — taxpayer designates exactly which coins were sold; requires detailed records

The IRS requires that the chosen method be consistently applied and supported by records. Many crypto tax software platforms such as CoinTracker, TaxBit, and Koinly automate this calculation across thousands of transactions.

Reporting Requirements: Form 8949 and Schedule D

Each capital gain or loss from crypto must be individually reported on Form 8949, then summarized on Schedule D of Form 1040. Since the 2019 tax year, the front page of Form 1040 has included a yes/no question asking whether the taxpayer received, sold, exchanged, or otherwise disposed of any digital assets. Answering incorrectly is a federal offense.

The Infrastructure Investment and Jobs Act of 2021 expanded the definition of broker to include crypto exchanges, requiring them to issue Form 1099-DA (digital asset) to customers starting with the 2025 tax year. Before this requirement took effect, many exchanges issued only partial 1099 forms, placing the full burden of tracking on taxpayers.

NFTs and DeFi

Non-fungible tokens (NFTs) are treated as collectibles when the underlying asset qualifies as a collectible under IRC Section 408(m). The maximum long-term capital gains rate on collectibles is 28%, higher than the 20% maximum on most long-term capital gains. The IRS issued guidance in 2023 clarifying that some NFTs qualify for this collectibles treatment.

DeFi protocols present evolving and contested tax questions. Providing liquidity to an automated market maker, receiving liquidity provider tokens, and subsequently withdrawing liquidity may trigger multiple taxable events. The IRS has not yet issued comprehensive guidance on all DeFi scenarios.

Wash Sale Rules and Crypto

Under the Tax Cuts and Jobs Act of 2017, the wash sale rule — which disallows claiming a loss if the same or substantially identical security is repurchased within 30 days — does not apply to property including cryptocurrency. As of 2025, a crypto investor can sell Bitcoin at a loss, immediately repurchase it, and still claim the tax loss. Legislation to apply wash sale rules to digital assets has been proposed but not enacted.

This article is for informational purposes only and does not constitute financial advice.