This is educational content, not tax advice. Talk to a CPA or Enrolled Agent about your specific situation — the general rules below have edge cases that can cost you real money, and the IRS doesn't grade on a curve.
This is Part 2 of the Crypto Tax 2026 series. Part 1 of this series covered what actually changed for the 2025 return — Form 1099-DA, the end of universal basis, the OBBBA sunset outcome. This part teaches you how to classify every transaction type you might see: what's a disposition, what's ordinary income, and what's a non-event. Every row on your Form 8949 or Schedule 1 starts here.
The foundation: crypto is property, not money
IRS Notice 2014-21, Q-1/A-1: "For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency."
That one sentence is the root of every rule that follows. IRC §61(a)(3) makes gains from dealings in property gross income. The test for when a gain is realised comes from Commissioner v. Glenshaw Glass (348 U.S. 426, 1955): "accession to wealth, clearly realised, over which a taxpayer has complete dominion." The IRS cites that phrase verbatim in Rev. Rul. 2019-24 and Rev. Rul. 2023-14. "Dominion and control" in plain language means you can actually move, sell, or use the asset — not just see a balance update.
The practical consequence: every time crypto leaves your control, the IRS asks two questions. Did the value change since you got it? And was the transfer a disposition? Gain or loss is the fair market value received minus your adjusted basis. That formula runs through all four sections below.
Dispositions — the four that catch everyone
1. Sell for USD. The classic. Capital gain or loss, short-term if held one year or less, long-term otherwise. Basis comes out of inventory under the method elected for that wallet under Rev. Proc. 2024-28. Part 3 covers the math.
2. Swap crypto A for crypto B (ETH → SOL, BTC → ETH, anything). Notice 2014-21 Q-6/A-6: "If the fair market value of property received in exchange for virtual currency exceeds the taxpayer's adjusted basis of the virtual currency, the taxpayer has taxable gain." Like-kind exchange treatment has not applied to crypto since the 2017 TCJA limited §1031 to real property. A swap is a sale-and-purchase compressed into one transaction.
3. Spend crypto on goods or services. Q-3 and Q-6 of Notice 2014-21 read together: a $4 coffee paid in BTC is a sale of BTC at $4 (gain or loss against your basis in that BTC) plus a $4 purchase of coffee. The coffee isn't taxable to you. The BTC is.
4. Stable-to-stable swap (USDC → USDT, DAI → USDC, and so on). Still a disposition. The fair market value is usually within cents of basis, so gain or loss is small — but small doesn't mean zero. These rows will appear on your 1099-DA if the swap touched a broker, and they have to match whatever you report.
In-wallet swaps count. Swapping assets inside Zelcore goes through a non-custodial router, but the tax event is identical to a centralised-exchange swap: the old asset is disposed of, the new one is acquired at its fair market value, and basis math applies to both legs. If you're running more than about fifty swaps a year or using aggregators that split fills across venues, the row-level reconciliation gets ugly fast — talk to a CPA before filing.
Income events — ordinary income at receipt
The pattern for every income event: ordinary income equal to fair market value on the date you gain dominion and control, and that fair market value becomes your new cost basis. The capital-gains clock starts the next day.
Staking (validation) rewards. Rev. Rul. 2023-14 (July 31, 2023): "the fair market value of the validation rewards received is included in the taxpayer's gross income in the taxable year in which the taxpayer gains dominion and control." The ruling applies whether you're a direct staker or staking through a centralised platform.
The Jarrett v. United States litigation is worth knowing about because people still cite it. Joshua Jarrett originally sued for a refund of 2019 taxes paid on Tezos staking rewards, arguing that newly created tokens are property not yet income until sold. The government tendered the refund, and the Sixth Circuit dismissed the case as moot on August 18, 2023 (No. 22-6023). The IRS then formalised its position in Rev. Rul. 2023-14. On October 10, 2024, the Jarretts filed a new suit in the Middle District of Tennessee (3:24-cv-01209) for their 2020 tax year, seeking a permanent injunction against the IRS treatment. That case was still pending as of April 2026. The correct posture for a 2025 return: follow current IRS guidance and document your position with a CPA.
Airdrops following a hard fork. Rev. Rul. 2019-24 Situation 2: ordinary income at fair market value when you have dominion and control. If the token lands in an exchange account that hasn't listed it, you don't have income until you can actually transfer or sell it.
Mining. Notice 2014-21 Q-8/A-8: fair market value at receipt is gross income. Q-9 adds self-employment tax if mining rises to a trade or business.
Interest and lending. Interest paid in crypto is ordinary income at fair market value — same §61 analysis as a bank account.
Play-to-earn rewards. Treat like any other token received for activity: ordinary income at receipt, basis equals fair market value.
Non-events — four things that are not taxable
Misunderstanding these costs people real money in unnecessary reporting, panic amendments, and — worst — lying on the Form 1040 digital-asset question when they didn't need to.
1. Buying crypto with USD. The IRS Digital Assets page explicitly lists "purchased, but did not sell, digital assets using U.S. or other real currency" among transactions that do not require a "Yes" answer to the digital-asset question.
2. Transferring between your own wallets. Virtual Currency FAQ Q38: "If you transfer virtual currency from a wallet, address, or account belonging to you, to another wallet, address, or account that also belongs to you, then the transfer is a non-taxable event." The one caveat: if the network fee is paid in digital assets, that fee itself is a disposition of the fee amount (usually tiny, but real).
3. Holding through a hard fork where you receive nothing. Rev. Rul. 2019-24 Situation 1: no accession to wealth, no gross income. Only holdings you actually received and can control create income.
4. Wrapping and unwrapping (ETH ↔ WETH, BTC ↔ WBTC, etc.). The IRS has not issued explicit guidance. Some practitioners treat wrapping as a non-event (economically equivalent, same beneficial ownership); others treat it as a disposition. Flag as unsettled, and ask a CPA before filing if you wrap or unwrap at volume.
NFTs, collectibles, and royalty income
NFTs inherit the property rules: buying, selling, swapping, or gifting an NFT triggers the usual disposition and basis math.
The twist is the collectibles question. Notice 2023-27 (March 21, 2023) announced the IRS's intent to apply a "look-through analysis" to decide whether an NFT is a §408(m) collectible. If the underlying right or associated asset is a collectible — art, gems, antiques, coins, stamps — the NFT is too. Long-term gains on collectibles are taxed at up to 28% under IRC §1(h)(4), rather than the 0/15/20% long-term capital gains brackets. For readers in the top brackets holding digital-art NFTs more than a year, that is a meaningful gap. Short-term NFT flips are always ordinary regardless.
Royalty income for creators. Ongoing royalties — say, 5% each time an NFT resells on a marketplace — are ordinary income at fair market value when received. Business creators also owe self-employment tax. Minting-cost treatment (how gas fees roll into basis or get expensed) is unsettled and fact-specific; it's CPA territory.
Gifts, donations, inheritance, and the de minimis myth
Giving crypto. Virtual Currency FAQ Q31: the giver does not recognise income from the gift itself. Gift-tax rules still apply; the annual per-donee exclusion amount is updated each year.
Receiving a gift. FAQ Q32: for gain, your basis equals the donor's basis (plus any gift tax the donor paid); for loss, basis is the lesser of the donor's basis or fair market value at the time of the gift. This "dual basis" rule is a classic trap that catches people years later.
Charitable donations. FAQ Q35: deduction equals fair market value if held more than one year; if held one year or less, it's the lesser of basis or FMV. FAQ Q36: donations over $5,000 require Form 8283 and a qualified appraisal — the donee signs Section B and the appraisal must be attached.
Inheritance. The §1014 stepped-up basis (to FMV on the date of death) applies to crypto the same as stock. The Virtual Currency FAQ doesn't have a dedicated Q on this; rely on general property rules and a CPA — especially if the decedent's wallet is self-custodied and you're reconstructing basis for estate purposes.
The de minimis myth. There is no personal-use or small-transaction exclusion for crypto under current U.S. law. Notice 2014-21 Q-2/A-2 specifically says virtual currency is not treated as currency for purposes of §988, which is why the §988(e) personal-use de minimis rule does not create a small-transactions exemption for crypto. Proposed legislation — variants have circulated since 2022 — has never been enacted. A $4 coffee paid in BTC is technically a reportable disposition. In practice the gain or loss is near zero, but the row still exists and still has to reconcile.
Edge cases and when to stop self-filing
DeFi liquidity provision, lockdrops, restaking rewards, perpetual-funding payments, MEV rebates, governance tokens received for past activity, bridged-asset events. The IRS has issued no specific guidance on any of these. Practitioners disagree on whether an AMM pool deposit is a disposition, whether LP token redemptions are dispositions, and how to characterise auto-compounding rewards.
The honest answer: this is CPA territory. How DeFi actually works covers the mechanics; the tax treatment does not follow from the mechanics alone, and the honest guidance is "it depends, and the law isn't settled."
A practical heuristic: if your 2025 transaction history includes anything beyond buy, sell, swap, send, stake, and airdrop, book an hour with a crypto-specialist CPA before filing. A good hour costs less than a reasonable-cause penalty abatement and far less than an audit.
Next up in the series: which specific coins did you actually sell, and how do you prove it under the new per-wallet rule? Part 3 covers cost basis, accounting methods, and the Rev. Proc. 2024-28 safe harbor.
