Do You Have to Pay Taxes on Crypto if You Reinvest?

When you reinvest profits from cryptocurrency, you must pay taxes. The Internal Revenue Service (IRS) treats cryptocurrency as property for tax purposes, not as currency. This classification means that when you dispose of your crypto, including selling it for cash or trading it for another type of crypto, it is a taxable event. The act of “reinvesting” is a two-step process in the eyes of the IRS: a sale of one asset, followed by the purchase of another.

Tax liability is triggered on the first step—the disposition of your original crypto asset. Even if the proceeds are immediately used to buy a different coin, the gain or loss on the original holding must be calculated and reported.

Understanding Taxable Crypto Events

A taxable event occurs at the moment you dispose of a cryptocurrency. This is the trigger for recognizing a capital gain or loss. The most common action that people consider “reinvesting”—trading one cryptocurrency directly for another, such as swapping Bitcoin for Ethereum—is a taxable event.

Other actions also qualify as taxable dispositions. Selling your cryptocurrency for U.S. dollars or any other fiat currency is a taxable event. Using cryptocurrency to pay for goods or services is also a disposition that requires tax reporting. In each of these cases, you are exchanging your crypto asset for something else of value, which finalizes the transaction for tax purposes.

Simply purchasing cryptocurrency with U.S. dollars is not a taxable event, as you are merely acquiring property. Holding onto your investment, a strategy known as “HODLing,” does not create a tax liability. Transferring cryptocurrency between different wallets or accounts that you personally own and control is not a disposition and therefore is not taxable.

A common misconception is that trading one crypto for another could be considered a “like-kind exchange” under Section 1031 of the tax code, which would defer taxes. However, the Tax Cuts and Jobs Act of 2017 amended this rule. Effective from January 1, 2018, Section 1031 treatment applies only to real property, explicitly excluding cryptocurrencies. Therefore, every crypto-to-crypto trade is a reportable event.

Calculating Capital Gains and Losses

To determine your tax liability, you must calculate the capital gain or loss for each taxable transaction. This calculation uses two figures: the proceeds and the cost basis. The proceeds are the fair market value, in U.S. dollars, of what you received when you disposed of the asset. If you sold Bitcoin for $50,000, your proceeds are $50,000.

The cost basis is the original amount you paid to acquire the cryptocurrency, including any associated transaction fees or commissions. For example, if you bought one Ethereum for $2,000 and paid a $25 transaction fee, your cost basis for that Ethereum is $2,025. The calculation is: Proceeds minus Cost Basis equals your Capital Gain or Loss.

The tax treatment of your capital gains depends on how long you held the asset. If you held the cryptocurrency for one year or less, the profit is considered a short-term capital gain. Short-term gains are taxed at your ordinary income tax rates, which are the same rates that apply to your salary and can range from 10% to 37%, depending on your income bracket.

If you held the asset for more than one year, the profit qualifies as a long-term capital gain. Long-term gains are subject to more favorable tax rates, which are 0%, 15%, or 20%, depending on your overall taxable income. This difference in tax rates makes the holding period a factor in tax planning for cryptocurrency investors.

Information Required for Tax Reporting

Reporting your crypto transactions requires careful record-keeping. For every taxable event—each sale, trade, or purchase of goods with crypto—you must have specific details ready. For each disposition, you must have the following information:

• The name of the cryptocurrency you sold or traded, such as Bitcoin or ETH.
• The exact date you initially acquired the specific units of crypto you disposed of.
• The date you sold, traded, or otherwise used the crypto.
• The proceeds from the transaction, which is the fair market value in U.S. dollars on the date of disposition.
• The cost basis for the assets you sold, which is the price in U.S. dollars at the time you acquired them, including fees.

Many cryptocurrency exchanges provide transaction histories or tax reports that can help you gather this data, and specialized crypto tax software can automate the process.

The Process of Reporting to the IRS

The primary form for reporting crypto transactions is Form 8949, Sales and Other Dispositions of Capital Assets. On this form, you will list each individual cryptocurrency transaction. You will enter the description of the crypto, the dates you acquired and sold it, the proceeds, and the cost basis for each trade. The form is divided into sections for short-term and long-term transactions.

After completing Form 8949, you will transfer the summary totals to Schedule D, Capital Gains and Losses. Schedule D consolidates the net short-term and long-term gains or losses from all your Forms 8949, as well as from other investments.

The final figure calculated on Schedule D—your total net capital gain or loss—is then carried over to your main tax return, Form 1040. This is how your cryptocurrency gains ultimately factor into your overall income and tax liability for the year.