Virtual currency is treated as property for Federal tax purposes by the IRS and is taxed accordingly.  As a result, you must recognize gain or loss on the exchange of virtual currency for cash or other property.  This is for all transactions in which virtual currency is sold, traded for a different virtual currency, or as payment for goods or services (received or provided).  It also applies to “mining” cryptocurrency as well as for new units received through a hard fork if at the time of receipt you have the ability to dispose of the new units.


The IRS website has an FAQ page with excellent information.

A CPA Journal post from January 2019 provides an informative explanation of the taxation of cryptocurrency in the most common circumstances.

When Do You Owe Taxes On Your Crypto?

Whenever you incur a taxable event from your crypto investing activity, you incur a tax reporting requirement.

A taxable event simply refers to a scenario in which you trigger or realize income. As seen in the IRS virtual currency guidance, the following are all considered taxable events for cryptocurrency:

  1. Trading crypto to fiat currency like the US dollar
  2. Trading one crypto for another cryptocurrency
  3. Spending crypto to purchase goods or services
  4. Earning crypto as income

Below, we run through practical examples to illustrate each of these taxable events.

  1. Crypto Fiat (USD)

Emma buys 2 ETH from Coinbase for $1,200. A few months later, Emma sells her 2 ETH for $1,000.

Selling crypto for fiat currency is a taxable event. In this example, Emma incurs a $200 capital loss (1,000 – 1,200). This loss gets deducted and actually reduces Emma’s taxable income.

  1. Crypto Crypto

John purchases 5 Litecoin for $250. After holding onto his Litecoin for a couple of months, John trades all 5 Litecoin for 0.5 ETH. At the time of the trade, 5 Litecoin is worth $400.

In this scenario, John incurs a taxable event by trading his Litecoin for Ethereum. Trading one crypto for another is treated as a disposal, and here John incurs a $150 capital gain from the trade which he would need to report on his taxes (400 – 250).

  1. Crypto Goods/Services

Taylor owns 5 bitcoin, each of which she bought for $100 pre-2014. Taking advantage of her new found wealth, Taylor uses 3 bitcoin to purchase a new Tesla for $51,000. At the time of buying the car, 1 bitcoin is worth $17,000.

In this example, Taylor incurs a taxable event when she disposes of her bitcoin for the new Tesla. She incurs a $50,700 capital gain in doing so (51,000 – 300) and needs to report this capital gain on her taxes.