The IRS treats cryptocurrency as property, which means every sale, trade, or disposal of crypto may trigger a taxable event. Your capital gain is the difference between what you received when selling and your original cost basis. Understanding how these gains are taxed is critical for staying compliant and planning your trading strategy.

The key distinction is between short-term and long-term capital gains. If you hold crypto for one year or less before selling, the gain is taxed at your ordinary income tax rate (10% to 37%). If you hold for more than one year, you qualify for lower long-term capital gains rates of 0%, 15%, or 20% depending on your income bracket. The formula is: Tax Owed = Capital Gain x Applicable Tax Rate.

For example, if you bought 1 BTC at $20,000 and sold it at $35,000 after holding for 18 months, your capital gain is $15,000. As a long-term gain in the 24% income bracket, the applicable rate is 15%, so you would owe approximately $2,250 in federal taxes, leaving you with $12,750 in net profit after tax.