Tax Basics for Crypto

In most jurisdictions, cryptocurrency is treated as property for tax purposes—similar to stocks, real estate, or other assets. This means certain events trigger tax obligations.

The key insight: simply holding crypto isn't typically taxable. But when you sell, trade, or use it, you may owe taxes on any gains you've realized.

Selling crypto for fiat currency: The most obvious taxable event. Your gain or loss is the difference between what you received and your cost basis (what you paid).

Trading crypto for crypto: Often overlooked, but swapping Bitcoin for Ethereum is typically a taxable event. You're treated as having sold Bitcoin and bought Ethereum.

Using crypto to pay for goods/services: If you buy a coffee with Bitcoin, you've technically sold Bitcoin and must calculate gain/loss on that transaction.

Receiving crypto as income: Mining rewards, staking income, and crypto paid as wages are typically taxed as ordinary income at receipt.

Cost basis is what you paid for the crypto, including fees. If you bought 1 ETH for $2,000 plus $50 in fees, your cost basis is $2,050.

Capital gain/loss is the difference between sale proceeds and cost basis. Sell that ETH for $3,000, and you have a $950 capital gain ($3,000 - $2,050).

Short-term vs long-term: Many jurisdictions distinguish between assets held less than a year (short-term, taxed as ordinary income) and more than a year (long-term, often taxed at lower rates).

When you have multiple purchases at different prices, you need a method to determine which coins you're selling:

FIFO (First In, First Out): Assumes you sell your oldest coins first. Often the default method.

LIFO (Last In, First Out): Assumes you sell your newest coins first. Can be advantageous in rising markets.

Specific identification: You choose exactly which coins to sell. Offers the most flexibility but requires detailed records.

Whichever method you choose, consistency and documentation are crucial.