What is Capital gains?

How it works

Capital gain = sale price − cost basis

The IRS treats this gain as either short-term or long-term based on how long you held the asset before selling.

Short-term (held ≤ 1 year): Taxed at your ordinary income rate (10%, 12%, 22%, 24%, 32%, 35%, or 37% for 2026).

Long-term (held > 1 year): Taxed at preferential rates:

(Bracket thresholds shift slightly each year; these are 2026 numbers.)

The 1-year line matters enormously. The same $50,000 gain might be taxed at 24% as short-term ($12,000 owed) or 15% as long-term ($7,500 owed) — a $4,500 difference for waiting one extra day to sell.

Example

You bought 1 BTC at $40,000 in January 2024 and sell it at $90,000 in:

• December 2024 (short-term, 11-month hold): $50,000 gain × 24% (assumed bracket) = $12,000 owed
• February 2025 (long-term, 13-month hold): $50,000 gain × 15% = $7,500 owed

If you can wait, you should — the tax savings on a year-plus hold can be substantial. This is why "capital gains harvesting" matters: deliberately timing sales to clear the 1-year mark.

Why it matters

Crypto capital-gains specifics that trip people up:

• Every crypto-to-crypto swap is a taxable event. ETH → SOL realizes the gain on the ETH leg even though you never saw USD.
• DeFi actions count. Wrapping ETH to wETH, providing liquidity, redeeming an LP position, even some bridge transactions can be taxable depending on interpretation.
• Staking rewards and airdrops are ordinary income at receipt, with cost basis set to the value that day. When you later sell those tokens, you pay capital gains on top.
• Losses offset gains. Sell a losing position before year-end to reduce your taxable gains. Wash-sale rules don't currently apply to crypto in the US (this may change), so you can sell at a loss and re-buy immediately.
• State tax matters. A 15% federal rate plus 13% California state tax = 28% effective. Texas and Florida residents save the state portion.

Long-term capital gains tax is one of the few legitimate tax breaks regular investors get. Holding for 366+ days when possible — and harvesting losses before December 31 — is the most reliable tax strategy in crypto and in equities.

For specifics, the Crypto Tax Estimator runs the numbers for a single sale across all 2026 brackets. For actual filing, use software (CoinTracker, Koinly, TokenTax) and a CPA who's done crypto returns before.