How the IRS Treats Crypto as Property, Not Currency, Including Tax Guidelines and Compliance Tips for Users.
Introduction
Cryptocurrency has quickly moved from being a niche investment to a mainstream asset in the USA. However, when it comes to taxes, many people are still confused about how the IRS views digital assets like Bitcoin, Ethereum, and stablecoins. The key fact is: the IRS does not treat cryptocurrency as currency. Instead, it classifies crypto as property.
This distinction has major tax implications for investors, traders, and even everyday users who buy goods and services with crypto. In this article, we’ll break down what “crypto as property” means, how it affects your taxes, and the rules you need to follow to stay compliant.
Why the IRS Classifies Crypto as Property
Back in 2014, the IRS issued Notice 2014-21, which was the first official guideline on cryptocurrency taxation. The notice clearly stated:
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Virtual currency is treated as property for federal tax purposes.
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General tax principles applicable to property transactions also apply to cryptocurrency.
The reason is simple: cryptocurrencies are not issued by any government, so they don’t qualify as legal tender in the eyes of the IRS. Instead, they are more like stocks, bonds, or real estate—assets that can appreciate or depreciate in value.
Tax Implications of Crypto Being Property
1. Capital Gains Tax
Whenever you sell, trade, or spend your cryptocurrency, it triggers a taxable event.
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If the value increased since you acquired it, you owe capital gains tax.
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If the value decreased, you may claim a capital loss to reduce your taxable income.
2. Short-Term vs. Long-Term Gains
Just like stocks:
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Short-term gains (crypto held less than 12 months) are taxed at your ordinary income tax rate.
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Long-term gains (crypto held over 12 months) are taxed at lower rates: 0%, 15%, or 20%, depending on your income bracket.
3. Spending Crypto = Selling Property
If you buy a coffee with Bitcoin, the IRS doesn’t see this as spending money—it sees it as selling property. That means you must calculate the gain or loss between the price you bought the Bitcoin at and its value when you spent it.
4. Receiving Crypto as Income
If you earn cryptocurrency (through mining, staking, freelancing, or salary payments), it’s treated as ordinary income at the fair market value (FMV) on the day you received it. Later, if you sell that crypto, you’ll face capital gains tax on any additional profit.
Non-Taxable Scenarios
Even though crypto is treated as property, not every action is taxable. Non-taxable events include:
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Buying and holding crypto without selling.
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Transferring crypto between your own wallets or exchanges.
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Gifting crypto under the annual IRS gift tax exclusion.
Why This Matters for Crypto Users
The IRS classification means that crypto record-keeping is critical. Every time you trade, sell, or spend crypto, you need to record:
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Date of acquisition
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Purchase price (cost basis)
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Sale/spending date
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Value at the time of sale or trade
Without proper records, it’s difficult to calculate gains and losses, and mistakes could lead to IRS penalties.
Penalties for Misreporting or Ignoring Crypto Taxes
Because the IRS treats crypto as property, failing to report it is the same as failing to report stock trades or property sales. Potential consequences include:
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Penalties and interest on unpaid taxes.
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IRS audits with requests for detailed transaction history.
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In severe cases, criminal charges for tax evasion.
Conclusion
The IRS’s decision to treat cryptocurrency as property, not currency has shaped how Americans must handle their digital assets for tax purposes. Every sale, trade, or purchase with crypto can create a taxable event, meaning accurate record-keeping and reporting are essential.
By understanding this property classification, crypto investors and users can stay compliant with IRS rules and even plan strategically to minimize their tax liability.
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