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Crypto Law/Level II · Tax: the first trap/2.1 Taxable events/Lesson 2

Selling for cash

How a sale of crypto for dollars is taxed in the US: amount realized minus basis, the holding period, the rates, and the forms that report it.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Sell only lots held more than one year: in 2026 long-term gains are taxed at 0% up to $49,450 of taxable income (single) or $98,900 (joint) under Rev. Proc. 2025-32; ordinary income fills that band first.
  2. With the 2026 standard deduction of $16,100 single or $32,200 joint, total income up to $65,550 or $131,100 can leave long-term gain at 0% federal tax; state income tax may still apply.
  3. Add purchase fees to basis and deduct selling fees from proceeds under Treas. Reg. §1.1001-7 for sales from 2025; the catch is proving both from your own exchange records.
  4. Sell specifically identified high-basis lots to shrink the gain (IRS FAQ 39); the identification must be made by the time of sale and, from 2025, wallet by wallet, or FIFO applies.
  5. Spread large sales across tax years to stay in lower brackets and under the unindexed 3.8% net investment income tax thresholds of $200,000 single and $250,000 joint; every sale still goes on Form 8949.

MaterialsIRS Topic no. 409, Capital gains and lossesForm 8949 and Schedule D (Form 1040), with their instructionsYour exchange’s year-end statement or Form 1099-DA, and your own purchase records

Wonder

  1. If I sell and keep the dollars on the exchange, has a taxable event happened yet?
  2. How is the gain worked out when fees were paid on both the purchase and the sale?
  3. What happens if I sell at a loss?

Explore

  1. Selling crypto for US dollars, or any other government currency, is the plainest taxable event. The IRS virtual currency FAQs say that when you sell virtual currency you must recognize any capital gain or loss, subject to the limits on deducting capital losses. The sale is complete when the trade executes, not when you withdraw the cash to a bank. Leaving the dollars in an exchange account does not postpone anything. This lesson covers sales for cash; swapping into another token is lesson 2.1.3 and spending is lesson 2.1.4.
  2. The calculation has two sides. Basis is what you paid in dollars, including fees, commissions and other acquisition costs. The amount realized is what you received, reduced by the costs of selling. For sales on or after January 1, 2025, Treasury regulation §1.1001-7 spells this out for digital assets: transaction fees, transfer taxes and commissions paid to dispose of a digital asset are allocated to that disposal. Example: you bought coins for $20,000 plus a $100 fee and later sell them for $30,000 minus a $150 fee. Basis is $20,100, the amount realized is $29,850, and the gain is $9,750.
  3. Timing decides the rate. If you held the coins one year or less, the gain is short-term and taxed at ordinary income rates. If you held them more than one year, it is long-term; the holding period begins the day after you acquired the coins and ends on the day of sale (lesson 2.3.2). Long-term gains are taxed at 0%, 15% or 20% depending on taxable income. For 2026, Rev. Proc. 2025-32 sets the top of the 0% band at $49,450 of taxable income for single filers and $98,900 for married couples filing jointly.
  4. Higher earners may owe more. The net investment income tax in section 1411 of the Internal Revenue Code adds 3.8% on net investment income, which includes net gains from disposing of property, to the extent modified adjusted gross income exceeds $200,000 for most single filers or $250,000 for married couples filing jointly. These thresholds are written into the statute in fixed dollars rather than adjusted for inflation each year. State income tax may apply on top; states differ, and some have no income tax.
  5. Losses work too, within limits. If the amount realized is below your basis, you have a capital loss. Capital losses first offset capital gains; after that, an individual can deduct up to $3,000 a year against other income ($1,500 if married filing separately), and the rest carries forward to later years. Selling at a loss and quickly buying back raises a separate question covered in lesson 2.3.3. Which coins you sold also matters: if you do not specifically identify units, the IRS treats the earliest acquired as sold first (lesson 2.3.1).
  6. Each sale goes on Form 8949, and the totals flow to Schedule D. Brokers must now report sales of digital assets to the IRS on Form 1099-DA; the instructions say brokers report basis only for ‘covered’ assets, and coins acquired before 2026 or transferred in from another wallet are generally noncovered, so the form may show proceeds without your cost. Your own records fill that gap (lesson 2.3.5). A practical check: pick one sale from last year and recompute the gain from your purchase record, not the exchange’s summary.

Key facts

  • The IRS FAQs state that selling virtual currency requires recognizing any capital gain or loss, subject to limits on deducting capital losses.
  • Basis in purchased virtual currency includes fees, commissions and other acquisition costs in US dollars.
  • Treasury regulation §1.1001-7 applies to sales and dispositions of digital assets on or after January 1, 2025, and reduces the amount realized by digital asset transaction costs.
  • For 2026, the 0% long-term capital gains rate applies up to $49,450 of taxable income for single filers and $98,900 for joint filers.
  • The net investment income tax is 3.8% and applies above $200,000 of modified adjusted gross income for most single filers and $250,000 for joint filers.
  • Net capital losses can offset up to $3,000 of other income a year ($1,500 married filing separately), with the excess carried forward.

Exercise nine, six, three, one

9CollectList up to 9 sales of crypto for cash that you made, or that appear in a sample exchange statement, noting the date bought, date sold, cost and proceeds where known.
6ClusterSort them into 6 categories: short-term gains, long-term gains, short-term losses, long-term losses, sales where the cost is missing, and sales where fees are unclear.
3DistillReduce the 6 categories to 3 groups: sales you can report from your own records, sales that depend on a broker form, and sales that need more records.
1CrystallizeWrite 1 sentence describing, in your own words, the two numbers that decide the gain on a crypto sale and where each one comes from.

Fact check

Dates, figures and claims checked against the published sources listed below.

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