Federal Crypto Tax Basics

The IRS treats all cryptocurrency as property. Selling, swapping, or spending crypto triggers a taxable event. Your gain or loss equals the difference between your cost basis (what you paid, including fees) and the fair market value at the time of disposal. Hold longer than 12 months and the federal rate drops to 0%, 15%, or 20% depending on your income. Sell earlier and it’s taxed as ordinary income at rates up to 37%.

Every transaction goes on Form 8949, then totals carry to Schedule D. Starting in 2025, centralized exchanges must issue Form 1099-DA, which means the IRS will have a direct record of your disposals. If your exchange numbers don’t match your return, expect a notice.

California’s 13.3% Problem

Most states that tax income at least offer some distinction between short-term and long-term capital gains. California does not. The Franchise Tax Board treats all capital gains — regardless of holding period — as ordinary income. That means your long-term crypto gains face the same rate schedule as your salary.

The 13.3% top rate applies to taxable income above $1 million for single filers. But even at $68,351, you’re already in the 9.3% bracket. For a Los Angeles investor who had a strong year in crypto, the combined federal-plus-state marginal rate on short-term gains can reach 50.3%. On long-term gains, it’s still north of 33% once you add the federal 20% rate and the 3.8% net investment income tax.

That’s the number that makes people think about moving to Nevada or Texas. Some actually do. But if you were a California resident when you realized the gain, California taxes it — regardless of where you move afterward. The FTB audits departing high-income taxpayers aggressively, and crypto gains are exactly the kind of windfall that triggers a residency audit.

Staking, Mining, and DeFi Income

Staking rewards are ordinary income at fair market value on the day they arrive in your wallet. The IRS confirmed this in Revenue Ruling 2023-14, and California follows federal treatment. If you’re earning $500 a month in staking rewards, that’s $6,000 of ordinary income for the year — taxable at both the federal and state level whether you sold the tokens or not.

Mining income works the same way: taxable when received, at fair market value. If you run mining hardware in LA, you can deduct electricity, equipment depreciation, and other direct costs as business expenses on Schedule C. But the income side hits your return immediately, and California’s high rates make it painful in a year when token prices are up.

DeFi protocols — liquidity pools, yield farming, lending — generate taxable events that no exchange is tracking for you. Every deposit, withdrawal, and reward distribution needs to be recorded with timestamps and USD values. This is where most LA crypto investors fall behind on their reporting, and it’s where the biggest audit exposure sits.

The Mental Health Tax and Other CA Surcharges

That 13.3% rate includes a 1% surcharge under the Mental Health Services Act, which applies to taxable income over $1 million. If you had a single large crypto exit — say, selling a position you’d held since 2017 — and the gain pushes you over $1 million in taxable income for the year, the extra 1% kicks in on everything above that threshold. It’s not a separate form or filing; it’s baked into the tax tables. But it’s worth knowing about because it means the jump from $999,999 to $1,000,001 in taxable income costs more than just a dollar.

Tax-Loss Harvesting for LA Investors

Given California’s rates, harvesting crypto losses is worth more per dollar than in most other states. The wash sale rule still does not apply to digital assets under federal law as of April 2025. You can sell a losing position, immediately rebuy the same token, and claim the loss on your return.

Say you’re sitting on $40,000 in realized gains and $15,000 in unrealized losses across a few positions. Harvesting those losses reduces your taxable gain to $25,000. At a combined marginal rate above 45%, that’s roughly $6,750 in tax savings. The tokens are back in your portfolio within minutes. There’s no waiting period, no substantially identical security analysis — at least not yet.

Record-Keeping for California Filers

California conforms to federal cost basis rules, so your Form 8949 data feeds both returns. Keep records of every acquisition (date, amount, price in USD, fees) and every disposal. For DeFi transactions, export on-chain data through a tracker like Koinly, CoinTracker, or TokenTax and reconcile it against your exchange records.

The FTB can audit up to four years after filing (six years if you underreport income by more than 25%). For crypto, the complexity of multi-chain DeFi activity means reconstructing records after the fact is painful and expensive. Track it as you go. Your future self will thank you.