Understanding capital gains tax on crypto

Like any investment, when you sell crypto for a profit, you'll need to pay capital gains tax. How much you owe depends on how long you've held the asset, which affects whether your gains are considered short-term or long-term, and your income bracket.

In this guide, we’ll explain the intricacies of capital gains tax on crypto, how to calculate it, and other details to know to stay compliant. We'll also cover the difference between short-term and long-term capital gains and tips for minimizing your tax liability. 

What is a capital gains tax?

A capital gains tax is a percentage of the profits collected by the government from the sale of investments such as stocks, bonds, real estate, and cryptocurrencies. In the United States, both individuals and corporations are required to pay capital gains taxes. The amount owed varies depending on the state of residence, income level, and the duration for which the investment is held, making it unique compared to other types of taxable income.

Some investments, however, are exempt from capital gains tax under certain conditions:

• Primary residence: Homeowners who have sold a primary residence at a gain can exclude up to $250,000 of profit ($500,000 for married couples filing jointly) from capital gains tax if they have lived in their primary residence for at least two of the last five years and haven't used the exclusion on another home sale in the past two years.
• Business income: Gains from the sale of business inventory are considered ordinary income and are taxed accordingly rather than being considered capital gains.
• Collectibles: The Internal Revenue Service taxes profits from selling collectibles, such as art or antiques, as ordinary income if held for less than a year. For collectibles held longer than a year, the gains are taxed at a maximum rate of 28%, which is higher than the typical long-term capital gains rate.

Does crypto have a capital gains tax?

Yes, the IRS enforces a capital gains tax on cryptocurrencies. By classifying crypto as property rather than currency, the IRS applies existing property investment tax rules to crypto transactions without needing new regulations specifically for cryptocurrencies. Understanding how cryptocurrencies are taxed involves several key factors:

Holding period 

Two classifications determine the taxes you pay on crypto gains: Short-term capital gains apply to investments held for one year or less and are taxed at ordinary income tax rates, ranging from 10% to 37%. Long-term capital gains apply to investments held for more than a year, with lower tax rates of 0%, 15%, or 20%, depending on your income level.

Annual income

Your annual income also impacts the capital gains tax rate. Whether your capital gains are short or long-term, the exact amount of tax will depend on your total taxable income for the tax year and filing status (single, married filing jointly, married filing separately, head of household or surviving spouse). Short-term gains are taxed at your marginal ordinary income rates, meaning a profitable investment could push someone into a higher tax bracket. Long-term gains are taxed at 0%, 15%, or 20%, depending on the filing status and total income. Generally, long-term capital gains rates are more favorable than ordinary income tax rates.

Capital gains tax rate 2025

Profit or loss amount 

The amount of profit or loss realized from a crypto transaction affects the taxes owed. The more significant the profit, the higher the tax bill, based on the holding period and annual income. If you incur a net capital loss from all your investments subject to capital gains tax, you can claim a tax deduction of up to $3,000 in net capital losses and carry forward any excess losses to offset future gains.

Strategies to minimize capital gains tax

Looking to reduce your capital gains tax bill? Here are a few strategies to consider that can help make tax time less burdensome:

Application of capital losses

Any net capital losses beyond $3,000 can be carried forward to future tax years. Some investors strategically sell investments at a loss to offset the tax burden from profitable investments, effectively reducing their overall tax liability.

Charitable donation of crypto

Donating appreciated assets, like cryptocurrencies, to a registered charity is another effective strategy to reduce your tax burden while supporting charitable causes. By donating a profitable investment, you may be able to avoid paying capital gains tax on the asset’s appreciation and receive a charitable tax deduction for the market value of the asset. This allows the charity to benefit from the full value of the donation, while the donor may qualify for a charitable tax deduction.

Highest-in-first-out (HIFO)

HIFO is a method for determining which assets have been sold in cases where multiple lots of the same asset were purchased at different prices over time. Under HIFO, investors sell the assets they acquired at the highest cost basis first. By selling the coins purchased at the highest price, investors realize lower gains or even losses, reducing their tax burden. This strategy defers the sale of coins bought at lower prices, which have higher potential gains, to a later time when it may be more tax-efficient to sell them.

How to report a capital gain or loss

To report your capital gains or losses to the IRS, you'll need to file Form 8949 and Schedule D (Form 1040). On Form 8949, you report each transaction, including details such as the sale date, purchase date, and amounts involved. Then, on Schedule D, you summarize this information, categorizing your gains as either short-term or long-term and adding up all of your capital gains and losses across all assets to come up with your net capital gain or loss for the tax year. If you have a net capital gain, that amount is factored into your taxable income for the year. If you have a net capital loss, you can deduct up to $3,000 against other ordinary income and carry over the excess indefinitely.

How to calculate your crypto taxes for gains and losses

Now that you understand how capital gains affect the sale of your profitable crypto investments, let’s go over the information you need to calculate your crypto taxes. Here are the key steps:

• Monitor your cryptocurrency transactions: Review all your transactions for the year to identify any sales that need to be reported to the IRS. Each transaction’s details are necessary to determine profit or loss and the holding period.
• Identify your proceeds and cost basis: Determine your crypto's purchase and sale prices. This information is crucial for filing your tax forms, along with any transaction fees associated with buying or selling the investment, as these can impact your proceeds and cost basis.
• Calculate your crypto profits: Subtract the cost basis from each transaction's proceeds or fair market value to calculate the taxable gain or loss (profit).
• Establish your capital gains tax rate: Determine the applicable capital gains tax rate based on the holding period, your filing status, and annual income.

CoinTracker: Making crypto tax reporting effortless 

Tax season is stressful enough without the added worry of correctly reporting your crypto transactions, especially with the constantly evolving policies around digital assets. Fortunately, CoinTracker can help.

CoinTracker's crypto tax software simplifies reporting and ensures compliance with current regulations by providing the latest tax information for all trading situations. With robust security, powerful wallet integrations, and automatic DeFi detection, CoinTracker helps you calculate and generate various tax reports effortlessly.

Start for free and discover why over 2 million cryptocurrency traders rely on CoinTracker to optimize their taxes. 

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