Understanding Crypto and Capital Gains

Cryptocurrency has rapidly gained traction as a significant player in the financial world. What started as a niche interest has become a significant investment class. Over the past year, the value of cryptocurrencies has shown strong performance, drawing more and more people into the world of digital investments. This trend is especially prevalent among younger investors.

As cryptocurrency becomes a more prominent part of investment strategies, it’s essential to understand how these digital assets are taxed. Specifically, every crypto investor should be aware of the concept of capital gains tax. Taxes can seem complex, but understanding how they apply to your crypto activities is crucial to ensuring that you stay compliant and make informed investment decisions.

What’s the Deal with Crypto?

Cryptocurrency, often called “crypto,” is a digital currency. Unlike traditional money, which is issued and regulated by governments, cryptocurrency is decentralized. This means it’s more independent of conventional banks and the regulatory structures around them. Instead, transactions are verified by a network of computers (called nodes) spread across the globe, intended to make it more secure and transparent.

This decentralized nature is a big part of what makes crypto so appealing. It offers an alternative to traditional financial systems, providing a level of independence and flexibility many like. However, because crypto operates outside conventional financial systems, it also brings a unique set of considerations—especially regarding taxes.

How Is Crypto Different from Regular Investments?

While crypto shares some similarities with traditional investments, such as stocks or bonds, there are also some key differences. One of the most notable is the changes in its market value. Crypto prices fluctuate significantly over short periods, more than many traditional investments. 

This presents both an opportunity and a risk. On the one hand, it offers the potential for high returns. On the other hand, it can lead to substantial losses. Understanding this dynamic is crucial for anyone involved in crypto, as it directly impacts how your investments are taxed.

Another difference is the relative newness of the crypto market. While stocks and bonds have been around for a while and are well-regulated, crypto is still evolving. This means that the regulatory environment around crypto, including tax laws, is still catching up, leading to some unique considerations for investors.

Crypto and Capital Gains Tax—What’s the Connection?

When you sell, trade, or use your crypto, you might trigger what’s known as a “taxable event.” This is where capital gains tax comes into play. In simple terms, capital gains tax is a tax on the profit you make from selling an asset. This applies to crypto in much the same way it applies to traditional investments.

For example, if you bought Bitcoin for $10,000 and later sold it for $30,000, you’ve made a profit of $20,000. This profit, or capital gain, is subject to tax. Your tax rate depends on how long you hold the asset before selling it. If you had the Bitcoin for more than a year before selling, you’ll likely qualify for long-term capital gains tax rates, which are generally lower. If you sold it within a year of buying it, you’ll be taxed at short-term capital gains rates, which can be higher and are the same as your regular income tax rate when you file your taxes.

Pro-tip: Use our free Cryptocurrency Calculator to give you an estimate of how much your crypto sales may be taxed and more.

Reporting Crypto on Your Taxes

The IRS treats cryptocurrency as property, which means that when you sell or trade crypto, you need to report the fair market value of the transaction in U.S. dollars.

To do this accurately, you must keep detailed records of your crypto transactions. These records should include the date of each transaction, the amount of crypto involved, its value at the time of the transaction, and any associated costs. Records are essential for calculating your capital gains or losses and ensuring that your tax return is accurate.

Many people find the record-keeping aspect of crypto investments to be challenging, especially if they’re actively trading. However, with TurboTax Premium you can automatically import up to 20,000 crypto transactions directly from your crypto platform at once allowing you to accurately report your crypto transactions. 

Real-Life Crypto Scenarios and Their Tax Impact

To better illustrate how crypto taxes work, let’s look at some common scenarios and their potential tax implications:

HODLing (Holding onto Crypto):
If you’re holding onto your crypto, you won’t trigger a taxable event. This means there’s no need to report anything until you decide to sell or exchange your holdings.

Selling Crypto:
This can trigger a taxable event, so be ready to report it. The resulting gain or loss must be reported on your tax return. Selling at a loss can offset other gains you’ve made, potentially reducing your overall tax liability.

Trading One Crypto for Another:
Even if you’re simply exchanging one cryptocurrency for another, the IRS treats this as if you’ve sold one asset and purchased another. This means you’ll need to report any gains or losses from the trade, just as you would if you were selling your crypto for cash.

Using Crypto to Purchase Goods or Services:
When you use crypto to buy something, it’s considered a sale of the crypto. The difference between what you paid for the crypto and its value when you use it to make a purchase is considered a capital gain or loss, which needs to be reported.

Stay Smart, Stay Compliant

As the crypto market continues to evolve, so do the tax rules. Staying informed is essential to remain compliant with IRS regulations. Here are a few key things to keep in mind:

• Upcoming 1099-DA Form:
  Starting in 2026 (for the tax year 2025), brokers and crypto platforms will be required to report crypto sales transactions to the IRS on a new form called 1099-DA.
  
• Preparing for 1099-DA:
  If you acquired crypto before January 1, 2025, make sure to:
  • Keep accurate records of your transactions, including the purchase price and date.
  • Provide your broker or platform with the cost basis (the original value of your crypto) by January 1, 2025 so they have the accurate cost basis to report if you sell your crypto..

Crypto offers exciting opportunities for investors but also comes with responsibilities, particularly regarding taxes. Understanding how crypto is taxed, especially regarding capital gains, is essential for anyone involved in the crypto market. You can ensure you’re prepared when tax season rolls around by keeping good records, staying informed about the latest tax rules, and being proactive about reporting your transactions.

In addition, TurboTax Investor Center is a new, premier cryptocurrency* investment tax software solution that offers crypto tax and portfolio insights year round. It lets users know how their crypto transactions could affect their tax outcome, track their overall portfolio performance, and make smarter financial decisions to advance their goals. Take the guesswork out of your crypto taxes!

At tax time, TurboTax Premium will guide you through your crypto transactions, allow you to import up to 20,000 crypto transactions at once, and figure out your gains and losses. You can meet with a TurboTax Live Full Service tax expert who specializes in crypto, who can prepare, sign, and file your taxes so you can be 100% confident your taxes are done right.