Crypto Tax Planning: What You Need to Know

The Internal Revenue Service (IRS) treats virtual currencies as property for tax purposes, not as foreign currency. This classification means that established principles of property transactions, including the tracking of gains and losses, apply to digital assets. For investors, this creates opportunities to manage tax liabilities through strategic decisions made throughout the year, rather than simply calculating a tax bill after the fact.

Identifying Taxable Crypto Events

A taxable event occurs when you dispose of a cryptocurrency, which triggers the need to calculate a capital gain or loss. Common taxable events include:

• Selling crypto for a fiat currency, such as U.S. dollars.
• Trading one type of cryptocurrency for another.
• Using cryptocurrency to purchase goods or services.
• Receiving cryptocurrency as payment for services or as wages.

When you receive crypto as payment, its fair market value is treated as ordinary income.

Not every crypto transaction triggers a tax liability. Purchasing cryptocurrency with U.S. dollars is not a taxable event, as it only establishes your cost basis. Holding your investment (“HODLing”) and transferring cryptocurrency between wallets you personally own also do not create tax obligations.

Calculating Gains and Losses

To calculate a capital gain or loss, you need two components: the cost basis and the holding period. The cost basis is the total amount you spent to acquire the cryptocurrency, including the purchase price and any transaction fees. Accurately tracking this figure is fundamental to correct tax reporting.

The holding period determines the tax rate. A short-term capital gain or loss results from selling an asset held for one year or less and is taxed at ordinary income rates. A long-term capital gain or loss is from an asset held for more than one year and is subject to more favorable rates of 0%, 15%, or 20%, depending on your taxable income.

The accounting method used to match sales with purchases can impact your tax liability. The default IRS method is First-In, First-Out (FIFO), which assumes the first coins you sell are the first ones you acquired. This method is straightforward but may not be the most tax-efficient in a volatile market.

The Specific Identification (Spec ID) method allows you to choose which specific units of a cryptocurrency you are selling. A popular variant is Highest-In, First-Out (HIFO), where you sell the coins purchased at the highest cost basis first to minimize gains or generate a loss. However, investors should note that proposed IRS regulations may require brokers to use FIFO for transactions starting in 2026.

Core Tax Reduction Strategies

Tax-loss harvesting is an effective technique that involves selling cryptocurrency at a loss to offset capital gains from other investments. If your capital losses exceed your capital gains, you can use up to $3,000 of the excess loss to offset ordinary income. Any remaining losses can be carried forward to future tax years.

For stocks, the wash sale rule prevents claiming a loss if you repurchase a similar asset within 30 days. Because the IRS classifies cryptocurrency as property, this rule does not currently apply. This allows an investor to sell an asset to realize a tax loss and then immediately buy it back, though legislative proposals aim to extend the wash sale rule to digital assets.

Gifting cryptocurrency is another planning avenue. You can gift up to the annual exclusion amount per recipient without filing a gift tax return; for 2025, this is $19,000. The recipient inherits your original cost basis and holding period, which can be a way to transfer assets to family members in lower tax brackets.

Donating cryptocurrency held for more than one year to a qualified charity offers a twofold tax benefit. You can typically deduct the full fair market value of the asset at the time of the donation. Furthermore, you do not have to pay capital gains tax on the appreciation of the donated crypto.

Advanced Tax Scenarios

When you earn rewards from staking or mining, the fair market value of the coins you receive is considered ordinary income. This income is taxable in the year you gain control over the assets. The value at which you recognize this income then becomes your cost basis for those coins.

Airdrops and hard forks also create taxable income. When you receive new cryptocurrency from these events, its fair market value is taxed as ordinary income once you have control over the asset, meaning you can sell, exchange, or transfer it.

In decentralized finance (DeFi), interest earned from lending your cryptocurrency is treated as ordinary income, similar to interest from a savings account. You must report this income based on its U.S. dollar value when earned. Maintaining detailed records of these transactions is necessary for accurate reporting.

Record Keeping and Reporting Requirements

Accurate crypto tax reporting requires meticulous record-keeping. For every transaction, you must track:

• The date you acquired the asset.
• Your cost basis, including fees.
• The date you sold, traded, or otherwise disposed of the asset.
• The proceeds you received from the disposition in U.S. dollars.

Without these records, it is impossible to accurately calculate your gains and losses.

This transaction data is reported on Form 8949, “Sales and Other Dispositions of Capital Assets.” The form has columns that correspond to the information you need to track. The totals from Form 8949 are then summarized on Schedule D, “Capital Gains and Losses,” which is filed with your Form 1040.

Taxpayers must answer a question about their digital asset activities on Form 1040. Starting with the 2025 tax year, brokers will report digital asset sales to the IRS on a new Form 1099-DA. For 2025 transactions, these forms will only report gross proceeds, meaning taxpayers remain responsible for tracking and reporting their own cost basis.