How Crypto Is Taxed in 2026: A Practical Guide for Holders and Active Traders

Long-term capital gain (held over 1 year). Federal LTCG rate depends on your other 2026 income.

Gain calculation: depends on how much you sell. If you sell all $100K worth: gain = $100K – $10K = $90K.

If you sell $50K worth: you’ve sold half. Gain on the half sold = $45K (half of your appreciation). The other half stays in your wallet at original basis pro-rated.

Federal tax on $90K of LTCG (assuming you sell all): – Add the $90K to your other 2026 taxable income – If your other income puts you in the 32-35% ordinary bracket (e.g., NYC tech professional earning $400K), your LTCG bracket is 20% (top LTCG bracket starts at ~$553K single / $621K MFJ taxable income) – 20% × $90K = $18,000 federal LTCG – Plus NIIT 3.8% × $90K = $3,420 (if your MAGI > $200K single / $250K MFJ) – Total federal: $21,420

If your other income is moderate (under top bracket): 15% LTCG rate. $13,500 federal + NIIT.

New York State tax: – NY taxes capital gains at ordinary rates (no preferential rate for LTCG at state level) – NY top rate is ~10.9% for very high earners; more typically 6.5-8.85% for $100K-$400K income – At 6.85% (middle bracket): $6,165 NY state – Plus NYC if you’re a NYC resident: 3.876% × $90K = $3,488

Combined for typical NYC tech professional selling $100K of Bitcoin with $90K gain: – Federal: ~$21K – NY state: ~$6K – NYC: ~$3.5K – Total: ~$30K combined tax on $90K gain – Net after tax: $60K

That’s about 33% effective rate combined. For a $100K Bitcoin sale, you’d actually receive $60K after-tax — meaningful for your down payment math.

Planning options to reduce the tax:

1. Sell less. Only sell what you actually need for the down payment. If you need $50K for the down payment plus closing costs and tax reserves, sell $80K of Bitcoin. Keep the rest in your wallet.

2. Hold over the year. You’ve already held >1 year, so LTCG rates apply. Don’t be tempted to sell short-term portions.

3. Pay the tax in 2026 vs. early 2027. The tax is due with your 2026 return (April 15, 2027 or extended date). You may want to make a Q4 2026 estimated payment to avoid underpayment penalty (typically required if you’ll owe more than $1K and aren’t covered by safe harbor).

4. Donate appreciated Bitcoin instead of cash. If you also want to make charitable gifts, donating Bitcoin directly to a 501(c)(3) charity or DAF eliminates gain on the donated portion AND gives you FMV deduction. Better tax outcome than selling Bitcoin + donating cash.

5. State tax: if you can establish residency in a no-state-tax state (FL, TX, TN, etc.) before the sale, save ~$9.5K of state+city tax. Practical only if you’re actually moving.

6. Don’t trigger short-term gain on more. If you have other crypto bought within the last year, don’t sell that. Wait until the 1-year mark for LTCG treatment.

Documentation: keep records of your 2020 purchase (exchange records, transaction hash if from a wallet, payment receipts) for basis substantiation. The IRS will get 1099-DA reporting for the 2026 sale showing your proceeds; your reported basis should match what’s documented.

Reporting: Form 8949 line item for the sale, dollar amounts to Schedule D, summary on Form 1040. NY return picks up the gain at state rates.

One more consideration: time the sale to the right tax year. If 2026 is a high-income year for you (year-end bonus, etc.), and 2027 will be lower-income, deferring the sale to 2027 may put the gain in a lower bracket. Same LTCG rates apply (this is a long-term holding) but your other income matters for determining whether you’re in the 15% or 20% LTCG bracket.

Staking rewards are ordinary income at FMV when received. Each reward distribution is a separate taxable event. Let me walk through the mechanics.

Tax treatment:

1. Each reward distribution = ordinary income at the FMV of ETH on the date you received it.

2. Track each receipt separately. If you got 0.1 ETH on January 15 when ETH was at $4,500, your income for that day = $450. If you got 0.12 ETH on February 15 when ETH was at $5,000, your income for that day = $600. And so on.

3. Total 2026 ordinary income from staking: sum of all reward FMVs at receipt dates.

4. The FMV at receipt becomes your basis for those staked ETH. When you later sell, gain = sale price – basis at receipt.

Reporting:

– Schedule 1 (Form 1040), Line 8z ‘Other Income’ or specifically the cryptocurrency-related line. Report the total staking income for the year. – Form 1040 ‘Digital Asset’ question: answer YES. – If staking is a business activity (significant scale, profit motive, etc.): report on Schedule C instead. Subject to self-employment tax. This is unusual for casual staking.

Tax cost on $6,000 of staking income: – Federal at marginal rate. If you’re in the 32% bracket: $1,920 federal income tax. – Plus state tax. NY at ~6%: $360. – Plus NYC if applicable: 3.876%: $233. – Total: roughly $2,500 of tax on $6,000 of staking income.

Additional considerations:

1. Self-employment tax exposure. If your staking activity is large enough to be a ‘trade or business’ (substantial, regular, profit-motivated), the income is subject to SE tax (15.3% on net earnings). For $6,000 of casual ETH staking via an exchange or platform, this is unlikely. The ‘trade or business’ standard is higher.

2. State tax of staking income. NY taxes ordinary income at progressive rates. Most states tax similarly. FL, TX, NV: no state tax.

3. Basis for future sales. Each ETH received as a reward has its own basis. If you received 0.1 ETH at $450 FMV, your basis on those 0.1 ETH is $450 ($4,500/ETH). When you sell those 0.1 ETH at $5,500/ETH = $550, your gain is $550 – $450 = $100. Short-term or long-term depending on whether you held those specific 0.1 ETH for more than 1 year from receipt.

4. Liquid staking (stETH, rETH, etc.): the tax treatment varies. The rewards may be embedded in the value increase of the liquid staking token rather than discrete distributions. Some interpretations treat the value increase as ordinary income at periodic intervals; others wait until exchange or sale. Get specific advice if you’re using liquid staking.

5. Pool staking vs. solo validator. Same tax treatment for the most part. Validators (you run your own node) may have additional deductions (electricity, hardware depreciation) that pool stakers don’t have.

6. Rev. Rul. 2023-14 confirmed treatment. The IRS officially ruled that staking rewards are ordinary income at receipt (when the taxpayer has dominion and control). Before 2023, some tax practitioners argued for deferral (treating rewards as not income until sale). That position is no longer supportable.

Documentation:

– Exchange or platform statement showing reward distributions with dates and amounts – FMV of ETH on each receipt date (use trading data from Coinbase or similar) – Tracking software (Koinly, CoinTracker, etc.) that calculates FMV at each receipt automatically

The 1099-DA reporting: starting 2026, US exchanges (where many people stake via exchange-staking programs) will report staking income on Form 1099-DA. The IRS will receive the data; your return needs to match.

If you’re staking via Coinbase, Kraken, etc. (exchange-staking), expect 1099-DA reporting. If you’re solo-staking from your own validator: self-report and document carefully.

For your $6,000 of staking income: – Add to ordinary income on your return – Pay ~$2,500 of combined tax – Track basis for each batch of staked ETH for future sale gain calculations – Continue staking if the after-tax yield works (5%-6% annual yield on ETH stake at ~30% combined tax = ~3.5-4% after-tax yield)

Yes, you can claim losses on crypto that went to zero, but the timing and documentation matter. Let me walk through the rules.

General rule: capital losses are deductible against capital gains plus up to $3,000 of ordinary income per year. Excess carries forward indefinitely.

For crypto that went to zero (like UST and Luna in 2022), three potential claim mechanisms:

1. Worthless security election (§165(g)). Generally not applicable to crypto under current rules — §165(g) applies to corporate stock and bonds. The IRS hasn’t extended worthless security treatment to crypto specifically.

2. Sale at de minimis value. If you can sell the worthless crypto for $0 or $0.01 on an exchange (some exchanges allow this), that’s a clean disposition. Sale price minus basis = your loss. Clean and documented.

3. Abandonment under §165 (Treas. Reg. §1.165-2). If you abandoned the property (intentionally relinquished ownership), you can claim a loss for the year of abandonment. The IRS Memorandum CCA 202302011 (January 2023) addressed crypto abandonment, providing some clarity: – Abandonment requires affirmative steps to permanently abandon (e.g., losing access to the wallet, transferring to a known burn address, etc.) – Mere decline in value to near-zero isn’t abandonment if you still own the tokens – Documentation of abandonment is critical

For UST/Luna specifically: – If you sold UST or Luna on an exchange before the tokens became truly worthless: capital loss at sale, deductible in the year of sale. – If you held UST/Luna through the crash and the tokens are now worthless (zero exchange value): can you claim a loss? – If you held them but never sold: technically you still own them. Loss isn’t realized until disposition. – If you can sell them now for $0.01: do so. Realizes the loss. Clean documentation. – If you can’t sell (exchange delisted, no buyers): consider abandonment if you can document permanent disposal.

The practical approach for UST/Luna held since 2022:

1. Check if your exchange still lists the tokens. Some delisted but kept them in ‘frozen’ state. Some allow zero-value sales.

2. If exchange listed at near-zero: sell at whatever bid you can get. Even selling at $0.001 per token realizes the loss. The IRS doesn’t require you to wait for a ‘fair’ market.

3. If exchange delisted and tokens are stuck in your account at zero value: tricky. You haven’t really disposed of them. Conservative position: wait until you can sell or abandon.

4. If self-custody and the token has no liquidity anywhere: consider abandonment. Document the steps (researched markets, no liquidity available, formally abandoned). Send tokens to a burn address (e.g., 0x0000…) and document the transaction hash. Claim loss in year of abandonment.

5. Document everything: original purchase records, decline in value (CoinMarketCap historical data), exchange delisting notices, attempts to sell, abandonment actions, burn address transaction hashes.

Retroactive losses for prior years:

If you sold UST/Luna in 2022 (when the actual crash occurred) and didn’t claim the loss on your 2022 return, you can amend the 2022 return to claim it. Form 1040-X, statute of limitations is 3 years from filing (so 2022 return amendable through April 2026).

For your $40K of losses: depending on when they were realized: – If realized in 2022 (sales completed): amend 2022 return. – If realized in 2023 (sales in that year): amend 2023 return. – If still ‘unrealized’ because you haven’t sold: realize them now (sell or abandon) and claim in 2026 return.

Application of losses:

Your $40K of crypto losses applies first to: – Crypto capital gains (offsetting any 2026 crypto gains dollar-for-dollar) – Other capital gains (stock sales, etc.) – Up to $3,000 of ordinary income per year – Excess carries forward indefinitely

Example: 2026 crypto loss harvest of $40K. Other 2026 capital gains: $25K (from selling appreciated Bitcoin). Loss usage: – Offset $25K of crypto gains: $40K – $25K = $15K loss remaining – Offset $3K of ordinary income: $15K – $3K = $12K loss remaining – $12K carries forward to 2027 and beyond

Tax savings from the loss: – Federal: $25K × 20% LTCG (avoided) + $3K × 32% ordinary (offset) = $5K + $960 = ~$6K of federal tax saved – State: similar savings

Without the loss harvest: you’d pay the full $25K × ~30% combined = $7,500 of tax on the gains.

Documentation file for the IRS: – Original purchase records (exchange statements, transaction hashes, dates, amounts) – Decline in value documentation (price charts, news articles about the project failure) – Disposition records (sale or abandonment) – Form 8949 reporting the loss (proceeds = $0 or de minimis, basis = original cost, loss = full basis)

For the 2022 Luna/UST crash specifically, many investors have already amended returns to claim the losses. If you didn’t, do so now. Time-sensitive — the 3-year statute of limitations runs out in 2025-2026 for 2022 losses.

If you have specific tokens that are illiquid or delisted: get a crypto-focused CPA to help with the abandonment documentation. Standard preparers may not be familiar with the §165 abandonment doctrine for crypto.

Your mining operation is likely a trade or business. That means the income is self-employment income (subject to SE tax) and the equipment is deductible business expense (with depreciation or §179). Let me walk through it.

Income treatment:

Ordinary income at FMV when mined. For each ETH you mine, the FMV at the moment of receipt is your income. Total 2026 income = sum of FMVs across all mined ETH.

Reported on Schedule C (Profit or Loss From Business). Net SE earnings (after expenses) are subject to: – Self-employment tax at 15.3% (12.4% Social Security up to wage base + 2.9% Medicare unlimited, plus 0.9% additional Medicare for high earners) – Federal income tax at marginal rate – State income tax

Deductions on Schedule C:

1. Equipment cost ($20K of GPUs): – §179 expensing: deduct up to the full $20K in year of purchase, subject to business income limitation. Easy for $20K within limits. – Bonus depreciation: 20% × $20K = $4K (2026 rate) – Regular MACRS: 5-year property (GPUs and mining equipment depreciate over 5 years) – For your $20K GPU purchase, §179 expense entire amount = full $20K deduction in 2026.

2. Electricity: the largest ongoing cost for miners. Track electricity used by mining vs. household use. Many miners install separate meters on mining circuits. Cost in mining states ranges $0.05-$0.20/kWh; can be major expense. Estimate $5K-$15K/year for a $20K GPU setup running 24/7.

3. Hosting/colocation fees: if you host equipment in a data center, those fees are deductible.

4. Internet, software, monitoring tools.

5. Cooling: dedicated cooling equipment, fans, climate control.

6. Pool fees: most miners join mining pools (Ethermine, etc.) and pay a small fee (typically 1-2%) for pool services. Deductible.

7. Repair and maintenance: GPU repairs, fan replacements, etc.

8. Home office: if you operate from home, allocate a portion of home expenses (rent, utilities, insurance) to the business based on square footage used.

9. Vehicle: if you drive for mining-related purposes (equipment pickups, etc.), mileage at the standard rate ($0.725/mile for 2026 projected).

10. Professional services: tax preparer, attorney for entity formation, accounting software.

Let’s project your 2026 P&L:

– Mining income: $50,000 – Electricity (estimate): $10,000 – Equipment §179 expense: $20,000 – Pool fees: $750 – Internet, software: $1,200 – Repairs: $500 – Home office allocation: $1,500 – Total expenses: $33,950

– Net SE earnings: $50,000 – $33,950 = $16,050

The net income after major deductions is much lower than gross. This is good for tax purposes.

Tax calculation on $16,050 of net SE earnings: – SE tax: $16,050 × 0.9235 (calculation step) × 15.3% = ~$2,267 – Federal income tax at your marginal rate (assume 24% bracket): ~$3,850 – State tax (NY at ~6.85%): ~$1,100 – Total tax: ~$7,200

Net after-tax income from mining: $16,050 – $7,200 = ~$8,850.

Cash flow perspective: you collected $50K of ETH (worth $50K), paid $10K of electricity and $750 of pool fees in cash, and paid ~$7K in taxes. Net cash flow: ~$32K.

The difference between net cash ($32K) and net taxable income ($16K) reflects depreciation and amortization (non-cash deductions). You got cash flow but also got a tax shelter on the equipment.

Multi-year analysis:

Year 1: large §179 deduction reduces income substantially. Years 2-5: smaller depreciation deductions (if you’d used MACRS instead of §179) or no further deduction (if you §179’d the whole equipment). Income looks higher in subsequent years unless you buy more equipment.

If you’re profitable: continue mining. If electricity costs spike or crypto prices drop, mining margins compress. Reassess annually.

Entity structure consideration:

– Sole proprietorship: simplest. Schedule C. All income hits your personal return. – LLC: pass-through entity. Same tax treatment as sole prop for single-member; can elect S-corp. – S-corp election: if mining net income is large (>$50K-$100K), S-corp election may save SE tax. You pay yourself a ‘reasonable salary’ (subject to FICA) and take distributions (not subject to SE). For a $20K equipment small operation, S-corp election is probably not yet worth the complexity.

Documentation:

– Mining pool statements (showing rewards received and dates) – Receipt of crypto in your wallet (transaction hashes) – FMV at receipt dates (use exchange data) – Equipment receipts (for §179 substantiation) – Electricity bills (allocate between business and personal) – Pool fee statements – Internet bills – Time log if applicable (for material participation if structured as business)

Quarterly estimated taxes:

At $7K-$10K of annual mining tax liability, you’ll need to pay estimated tax quarterly. Don’t wait until April 15 of the following year. Quarterly due dates: April 15, June 15, September 15, January 15.

Form 1040-ES for federal. State and city equivalents.

Safe harbor: paying 110% of prior year’s tax (if prior year AGI > $150K) protects you from underpayment penalty regardless of current year liability.

For a casual miner with $50K of income: this is meaningful tax exposure. Track everything carefully. Use accounting software (QuickBooks Self-Employed, etc.) to maintain records throughout the year.

The IRS doesn’t directly ‘know’ about self-custody holdings unless you’ve connected them to a reporting source. But several mechanisms create indirect visibility, and the legal obligation to report doesn’t depend on whether the IRS already knows.

The direct reporting picture:

1. Self-custody wallets (Ledger, Trezor, paper wallets, MetaMask, etc.) don’t have a centralized operator who reports to the IRS. Your hardware wallet doesn’t issue 1099s.

2. Centralized exchanges (Coinbase, Kraken, etc.) issue Form 1099-DA starting in 2026 for transactions on their platforms. If you sell self-custody Bitcoin on Coinbase, the sale is reported.

3. On-chain transactions are public. Anyone can view your wallet address’s transaction history if they know the address. This includes the IRS using Chainalysis or similar tools.

4. KYC at exchanges: when you signed up at any exchange (even just to buy initially), you provided ID. The exchange has records linking your identity to your account. The IRS can subpoena exchange records.

Indirect visibility mechanisms:

1. Bank deposits. When you eventually sell crypto and deposit dollars to your bank, the bank reports large deposits and unusual activity (over $10K cash or structured deposits) to FinCEN under Bank Secrecy Act.

2. Real estate purchases. Title transfers are recorded. If you bought a house with crypto-derived funds, the recording creates a public trail.

3. Lifestyle audit triggers. Significant wealth disparity between reported income and apparent lifestyle (cars, properties, travel) flags taxpayers for IRS scrutiny.

4. Information matching. The IRS aggregates data from many sources (1099s, financial reports, etc.) and looks for inconsistencies.

5. Whistleblower or competitor reporting. Disgruntled associates, ex-partners, or competitors sometimes report tax avoidance to the IRS for the whistleblower reward (up to 30% of recovered tax).

6. Chainalysis and similar tools. The IRS contracts with blockchain analytics firms. They can trace transactions across wallets and link to known KYC’d addresses.

What triggers IRS investigation:

– 1099-DA mismatches (you sold crypto, the exchange reported it, you didn’t include it on your return) – Inconsistent reporting (you reported some crypto but the IRS has data on more) – Whistleblower tips – IRS Criminal Investigation Division leads – Audits selected from various risk-scoring systems

Legal obligation to report:

Regardless of whether the IRS knows, you have a legal obligation to report taxable transactions. Failure to report is tax evasion under §7201 (felony, up to 5 years imprisonment) or tax fraud (civil penalties up to 75% of underpayment).

The ‘I didn’t think they knew’ defense doesn’t work. The legal obligation is independent of detection.

For your Bitcoin in a Ledger:

– HOLDING the Bitcoin is not a taxable event. No reporting needed for mere holding. – TRANSFERRING between your own wallets is not a taxable event. No reporting needed. – SELLING or SPENDING the Bitcoin is taxable. Must report. – RECEIVING the Bitcoin (as income, payment, or reward) is taxable. Must report.

When you bought the Bitcoin: if from a US exchange, KYC linked to your identity. Acquisition recorded.

When you sell: at a US exchange, 1099-DA reports the sale. Outside a US exchange (e.g., peer-to-peer or DEX), no automatic reporting, but the transaction is on-chain and traceable.

FBAR question for self-custody:

FBAR (FinCEN 114) requires reporting foreign financial accounts with aggregate value exceeding $10K. The Treasury has indicated intent to require crypto FBAR reporting; specific rules are evolving.

For self-custody (you hold the keys, no third party): FBAR likely doesn’t apply because there’s no foreign financial institution holding your assets. You hold them directly.

For crypto held on foreign exchanges (e.g., Binance International, Bitget, etc.): FBAR likely applies if aggregate exceeds $10K. Report on FinCEN 114 annually.

Form 8938 (FATCA): foreign financial assets reporting at higher thresholds ($50K-$200K depending on filing status). May apply to foreign exchange holdings.

What to do if you’ve been under-reporting:

If you have historical unreported crypto transactions, consider:

1. Streamlined Disclosure Procedures (if international issues — foreign exchanges, FBAR omissions): the IRS offers programs for taxpayers to come into compliance with reduced penalties.

2. Voluntary disclosure (general): the IRS Criminal Investigation Voluntary Disclosure Program lets taxpayers with willful violations come forward and reduce criminal exposure. Doesn’t eliminate civil penalties.

3. Amended returns (Form 1040-X): for negligent but not willful underreporting, amend prior returns to include the missed income. Pay tax + interest. Lower penalties than waiting for audit.

4. Statute of limitations: 3 years from filing for regular underreporting. 6 years for substantial omission (>25% understatement). No statute for fraud.

The best path forward depends on: – How much was unreported – How many years are affected – Whether the omission was negligent or willful – Whether the IRS has already started inquiring

For your specific situation: if you’ve held Bitcoin in self-custody without selling, no reporting required (just holding). If you’ve sold or spent any of it, the gains were reportable in the year of disposition.

Going forward (2026+): every disposition is a taxable event. Track basis carefully. The 1099-DA reporting for US exchange transactions will create matching. Self-custody movements aren’t directly reported but are traceable.

For large holdings, get a crypto-focused tax professional. The investment is small relative to the holdings and the risk of error or underreporting. Our strategic tax team handles crypto for HNW NYC clients regularly.