The Difference Between Capital Gains and Income Tax on Crypto
Introduction
Cryptocurrency taxation in the U.S. depends on how the digital assets are acquired, used, and sold. The IRS classifies cryptocurrency as property, meaning it can be taxed as capital gains or ordinary income depending on the transaction. Investors and traders must understand the key differences between capital gains tax and income tax on crypto to ensure compliance and optimize their tax strategy.
This article explains the differences between capital gains tax and income tax on cryptocurrency, including when each applies and how tax rates differ.
1. What is Capital Gains Tax on Crypto?
Capital gains tax applies when cryptocurrency is sold, exchanged, or disposed of at a profit. The gain is calculated as the difference between the selling price and the original purchase price (cost basis).
Capital Gains Tax Rates
- Short-Term Capital Gains (held for ≤1 year): Taxed as ordinary income (rates range from 10% to 37%).
- Long-Term Capital Gains (held for >1 year): Taxed at preferential rates of 0%, 15%, or 20%, depending on taxable income.
Examples of Crypto Transactions Subject to Capital Gains Tax
- Selling crypto for fiat (USD, EUR, etc.) at a profit.
- Trading one cryptocurrency for another (e.g., BTC to ETH).
- Using crypto to purchase goods or services (if the crypto has appreciated in value).
2. What is Income Tax on Crypto?
Crypto earned as compensation or rewards is taxed as ordinary income based on its fair market value at the time of receipt. Unlike capital gains, crypto classified as income is taxed at regular income tax rates and may also be subject to self-employment taxes if earned through work.
Examples of Crypto Transactions Subject to Income Tax
- Receiving cryptocurrency as salary or wages (taxed as regular income).
- Earning crypto through mining rewards or staking.
- Receiving airdrops or referral bonuses.
- Earning crypto interest from lending platforms.
3. Key Differences Between Capital Gains Tax and Income Tax on Crypto
| Category | Capital Gains Tax | Income Tax |
| Applies to | Selling, trading, or spending crypto at a profit | Earning crypto through work, staking, mining, or airdrops |
| Taxed as | Capital gains (short-term or long-term) | Ordinary income |
| Tax Rates (2025) | 0%, 15%, or 20% (long-term) / 10%–37% (short-term) | 10%–37% (based on income bracket) |
| Self-Employment Tax? | No | Yes (if earned from mining or self-employment) |
| Tax Calculation Basis | Profit (selling price – cost basis) | Fair market value at receipt |
4. Tax Reporting and Compliance
- Capital Gains Tax Reporting: Report crypto sales and exchanges on Form 8949 and Schedule D of the tax return.
- Income Tax Reporting: Report crypto earnings on Form 1040 (Wages/Other Income) or Schedule C if self-employed.
- Record-Keeping: Maintain detailed records of transactions, cost basis, and fair market value to ensure accurate tax reporting.
Conclusion
Cryptocurrency can be taxed as capital gains or ordinary income, depending on how it is acquired and used. Capital gains tax applies to profits from selling or trading crypto, while income tax applies to earnings from mining, staking, airdrops, and payments received in crypto. Understanding the difference between these tax treatments is crucial for compliance and tax optimization.
Tax Partners can help crypto investors and traders develop tax-efficient strategies to minimize their tax burden and ensure proper reporting.
This article is written for educational purposes.
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