Capital gains tax on crypto: How it works and tips for filing

Cryptocurrencies have yet to overtake cash, but they’re too big for federal agencies to ignore. The IRS treats cryptocurrency as a form of property, which means that transfers between digital assets and exchanges for fiat don’t count as currency conversions. This means when you sell or swap a cryptocurrency and realize a profit, the difference between your proceeds and your cost basis is a capital gain, which is subject to tax.

Let’s see how the IRS rules for capital gains tax apply to cryptocurrencies, and talk about how your holding period, income bracket, and other factors influence the amount you pay. We’ll also explore top strategies for legally reducing your tax liability.

Capital gains tax explained

Capital gains tax is a percentage the IRS collects on the profits from sales (aka disposals) of most forms of property and investments. When preparing your taxes, you’ll calculate this profit by subtracting the sale’s proceeds from what you originally paid for the asset (aka the cost basis).

In addition to cryptocurrency, capital gains tax applies to many traditional assets like stocks and real estate. Both individuals and corporations have to pay capital gains tax in the year gains are realized, and the amount you owe depends on your income and how long you held each investment before disposing of it.

There are a few special rules to the capital gains tax:

• Primary residence: If you sell your primary residence at a gain, the IRS lets you exclude some of the profits from capital gains tax, provided you lived in the residence for two of the past five years and haven't used this exclusion recently.
• Business inventory: Any gains from the sale of business inventory are considered ordinary income rather than capital gains.
• Collectibles: The IRS taxes profits from selling collectibles as ordinary income if you held them for less than a year, or at a maximum rate of 28% if you kept them for more than one year. Note that this rule applies to some non-fungible tokens.

Short-term versus long-term capital gains tax

Time is one of the key factors that determines how much you pay in crypto capital gains tax.

Short-term capital gains tax rules

Any digital assets you hold for one year or less before selling are taxed at ordinary income rates as short-term capital gains. That means they fall within your federal tax bracket, which ranges from 10–37% depending on your taxable income.

Long-term capital gains tax rules

To incentivize investing rather than trading, the IRS offers more favorable long-term capital gains tax rates if you hold onto your crypto for over one year before selling it. Long-term capital gains are taxed at three preferential rates – 0%, 15%, and 20% – depending on your income.

How capital gains affect your crypto taxes

Since the IRS classifies cryptocurrency as property, it applies capital gains tax to crypto disposals. As we saw above, what you owe depends partly on how long you held your coins.

Your income also affects what percentage of crypto gains you have to pay to the IRS. Although income brackets are adjusted annually for inflation, here are the current capital gains tax rates.

Short-term capital gains rates for the 2025 tax year

Long-term capital gains rates for the 2025 tax year

Calculating your capital gains tax

Your holding period and income bracket tell you the rate you’ll pay on crypto gains, but not how much the IRS will tax. To calculate what you owe, you need to subtract the crypto’s cost basis from the proceeds at time of sale, then apply the relevant tax rate to your earnings.

Strategies to minimize your capital gains tax

Here are a few techniques you can use to reduce or even eliminate how much you pay in crypto tax each year.

Tax-loss harvesting

One straightforward way to cut down on capital gains is to deliberately sell other assets at a loss – this is called tax-loss harvesting. Realized capital losses reduce your taxable gains, and they could lower your taxable income if they exceed your profits. The IRS lets you claim up to $3,000 ($1,500 if married filing separately) per year in net capital losses against your ordinary income, and you can carry forward unused losses into future tax years.

Make charitable donations in crypto

As long as the charity you give to is an IRS-recognized 501(c)(3) organization, you won’t pay taxes on gains from donated crypto. Not only does this save you money, you can give more with a direct crypto transfer, rather than converting to fiat first and losing money to fees.​

You can also claim crypto donations to 501(c)(3) organizations as tax deductions on IRS Form 1040 Schedule A. If you held the crypto for more than one year before donation, the asset’s fair market value (FMV) at time of transfer is your deductible amount. However, if your holding period was less than one year, you’ll claim the crypto’s cost basis or FMV, whichever is lower.

Apply a different cost basis calculation

By default, the IRS uses the first in, first out (FIFO) method to determine the cost basis for cryptocurrencies in your portfolio. FIFO uses the earliest acquired units as the cost basis when you dispose of that asset.

For example, let's say you bought one Bitcoin (BTC) for $25,000, later bought another BTC for $30,000, and then sold one BTC for $50,000. Using FIFO, you’ll subtract $25,000 (cost basis of the first BTC purchased) from $50,000 (first disposal), resulting in a taxable gain of $25,000.

However, you can elect to use other cost basis calculation methods, such as specific identification (Spec-ID). With Spec-ID, you can specify which crypto purchase counts as the cost basis for each disposal, which gives you more flexibility when determining taxable gains. In the above example, you could use $30,000 as your cost basis to reduce your taxable gain to $20,000.

The main ways to use Spec-ID to optimize cost basis calculations are highest in, first out (HIFO) and last in, first out (LIFO). HIFO is usually the most tax-efficient method, because it starts with the highest purchase price as the cost basis for the first disposal and steadily works down to lower-cost purchases. LIFO focuses on timing, using the most recently purchased asset as the first cost basis and working backwards for subsequent sales.

How to report a capital gain or loss to the IRS

To report crypto capital gains and losses, you’ll need IRS Form 8949 and Schedule D. Both forms rely on the same information, but Form 8949 provides a detailed overview of transactions throughout the year, while Schedule D summarizes your total proceeds and taxable gains or losses. Make sure to track all the details for every crypto transaction you make, so you have the information you need for both forms.

Make crypto tax reporting effortless with CoinTracker

To meet the IRS’s requirements, you’ll need to supply them with clear records of how long you held each cryptocurrency, what transactions you made, and the cost basis and FMVs for all exchanges and sales. Take care to identify which crypto transactions were disposals versus transfers, since sending crypto between exchange accounts or self-custodial wallets isn’t a taxable event.

​Tax time is approaching – are you prepared? Let us simplify your crypto tax journey. Create a free CoinTracker account and let our platform handle the complexities.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.