How it works
Every disposal of a digital asset is a capital transaction: selling for dollars, trading for another coin, spending on goods, or gifting above the annual exclusion. Gain or loss is proceeds minus basis. Assets held one year or less produce short-term gains taxed at ordinary rates; assets held longer produce long-term gains taxed at 0, 15, or 20 percent, plus the 3.8 percent net investment income tax above the thresholds. Transactions are listed on Form 8949 and totaled on Schedule D.
Why it matters
The holding period is measured per unit, so the cost basis method decides whether a gain is short or long term. High-frequency trading almost always produces short-term gain at the highest rates.
Example
You bought 5 ETH at 2,000 dollars each in January 2024 and sold them in March 2025 for 4,000 dollars each. The 10,000 dollar gain is long-term. Had you sold in December 2024, it would be short-term and taxed as ordinary income.
Related: holding period, net investment income tax. Read more: how to calculate crypto capital gains.
