Cryptocurrency
Cryptocurrency is a digital currency secured by cryptography and recorded on a decentralized blockchain network — not controlled by any government or central bank. Bitcoin and Ethereum are the two largest by market capitalisation. The IRS treats crypto as property for tax purposes.
Cryptocurrencies operate on distributed ledgers (blockchains) where transactions are verified by a network of computers rather than a central authority. Bitcoin (BTC) was created in 2009 as the first decentralized digital currency; Ethereum (ETH) followed in 2015 with the ability to run self-executing "smart contracts."
From a tax perspective, every crypto transaction in the US is a taxable event. Buying crypto with cash is not taxable. But selling crypto for dollars, trading one crypto for another, or spending crypto on goods/services all trigger capital gains or losses based on the difference between sale price and cost basis.
Crypto is among the most volatile asset classes — Bitcoin has experienced multiple 80%+ drawdowns followed by new all-time highs. Most financial advisors recommend limiting crypto to 1–5% of a total portfolio if including it at all, given the speculative nature and regulatory uncertainty.
Put this into practice with our free calculator:
Open calculator →Related terms
- Capital Gains
- A capital gain is the profit from selling an asset (stock, real estate, crypto, etc.) for more than you paid. In most countries, capital gains are taxed differently from ordinary income.
- Cost Basis
- Cost basis is the original value or purchase price of an asset for tax purposes. Capital gains tax is calculated on the difference between the sale price and the cost basis.
- Tax-Loss Harvesting
- Tax-loss harvesting is the practice of selling investments at a loss to offset capital gains, reducing your tax bill. The proceeds are reinvested in a similar (but not identical) asset to maintain market exposure.
- Volatility
- Volatility measures how much an investment's price fluctuates over time. High volatility means large, unpredictable price swings; low volatility means stable prices. Standard deviation is the most common volatility measure; the VIX index measures expected S&P 500 volatility.