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Crypto Taxes, Explained: Wallets, Stocks, Funds and Futures

Cryptocurrency may feel new, but the tax rules aren’t. From wallets to futures to ETPs, here’s what you should know about how the IRS treats crypto.

Key Takeaways

  • For federal taxes, cryptocurrency is generally treated like an asset, so when you sell it, trade it for another token, or use it to buy something, you may owe tax on any change in value from what you originally paid plus fees.
  • Holding period matters: Crypto held for one year or less is typically taxed at ordinary income tax rates, while crypto held for more than one year may qualify for lower long-term capital gains rates.
  • Crypto futures and certain exchange-traded products may generate taxable income even if you do not sell, due to mark-to-market rules.
  • Holding crypto longer, harvesting losses to offset gains, and limiting frequent trading may help reduce tax drag and reporting complexity.

If you’re investing in crypto, you might be more focused on price trends than IRS tax forms. But whether you’re holding Bitcoin in a wallet, trading crypto futures, or buying a crypto exchange-traded product in a brokerage account, the IRS is paying attention. And depending on how you get your crypto exposure, you may owe taxes in ways that may not seem obvious or intuitive.

 

This article breaks down how crypto is taxed in the U.S., what events trigger federal income taxes, and why two investors with similar exposure may end up with very different after-tax results.

How crypto is taxed: the basics

For U.S. federal tax purposes, cryptocurrency is treated as property, not currency.1 This puts crypto in the same broad tax category as assets like stocks, bonds and real estate, rather than cash. As a result, most crypto trading activity is governed by capital gains rules:

  • Gains or losses: Whenever you dispose of crypto—by selling, trading or spending it—you generally recognize a capital gain or a capital loss equal to the difference between the amount you received in the transaction and the asset’s “cost basis” (the original price you paid, including commissions and fees).2
  • Short vs. long-term holdings: Investment assets, including crypto, held for one year or less are generally taxed at ordinary income tax rates, while assets held for more than one year benefit from preferential long-term capital gains rates.3

 

That said, not all crypto activity falls under capital gains rules.

 

Cryptocurrency received as compensation—including “airdrops” (token distributions sent to eligible wallet addresses) or “staking rewards” (tokens earned for helping validate or secure a blockchain network)—is generally taxed as ordinary income, at its fair market value when you gain dominion and control of it.4 That value then becomes the cost basis for future gain or loss calculations.

 

In addition, investors may face tax consequences if a “hard fork” event (when a blockchain splits after a protocol changes) results in them receiving units of a new digital asset and they have dominion and control over those units.

How is directly-owned crypto taxed?

Directly owning crypto means you hold coins or tokens in a wallet or exchange account.

  • Buying crypto with U.S. dollars is not a taxable event. However, the purchase price and transaction fees should be carefully tracked, because they establish the cost basis.2 Similarly, transferring crypto between wallets owned by the same taxpayer is generally not a taxable event.5
  • Selling crypto for cash, however, is a taxable event. For example, if you buy one Bitcoin for $80,000 and, more than one year later, sell it for $130,000, the $50,000 gain is generally taxed at long-term capital gains rates.
  • Trading one crypto for another also triggers taxes, even though no dollars change hands. Trading Bitcoin for Ethereum, for instance, is treated as selling Bitcoin at its fair market value and using the proceeds to buy Ethereum1—so, any gain or loss on the Bitcoin must be recognized immediately.
  • Spending crypto works the same way, because it counts as a disposition of property, meaning any appreciation is taxable.1 Let’s say you buy Ethereum for $2,000 and later use it to purchase a laptop when Ethereum is worth $3,000. The $1,000 increase in value is a taxable gain, even though no cash was involved.
  • Crypto rewards are taxable events and are generally taxed as ordinary income. This can include the receipt of crypto as a reward for staking your position or from the receipt of new tokens from cryptocurrencies that entitle you to airdropped rewards.
i
Trading one crypto for another also triggers taxes, even though no dollars change hands.

How are crypto futures taxed?

Crypto futures sit closer to traditional derivatives than spot crypto, and their tax treatment reflects that. Bitcoin, Ethereum and Solana futures all trade on regulated U.S. exchanges under Section 1256 of the Internal Revenue Code, which governs certain regulated futures contracts.6 Two key things to remember:

  • These crypto futures contracts are subject to “mark-to-market” taxation, meaning they are treated as if they were sold at the end of every year, whether or not you actually closed the position.7
  • Annual gains and losses are taxed under a blended formula: 60% is treated as long-term capital gain and 40% as short-term, regardless of how long the contract was held.6

 

This tax treatment may benefit active traders compared with short-term capital gains taxation, but it comes with a catch: It requires recognition of gains and losses on a mark-to-market basis at year-end, meaning you can owe taxes even if you haven’t sold the contract or received any cash. That surprise may make futures a less-than-ideal fit for long-term investors.

 

These tax characteristics also affect investment products that hold crypto futures, as the underlying futures’ gains and losses flow through to investors indirectly.

How are crypto exchange-traded products taxed?

Crypto exchange traded products (ETPs) allow investors to gain indirect crypto exposure through traditional brokerage accounts, but their tax treatment depends on how they are structured.

 

Spot crypto ETPs

 

These hold actual cryptocurrency, such as Bitcoin or Ethereum, on behalf of investors. Crypto ETPs may be structured as grantor trusts for tax purposes.

 

For these products, investors are responsible for income tax generated by the ETP’s investment activities, even if no cash is distributed to the investor. For example, if the crypto ETP actively trades a cryptocurrency throughout the year and earns staking rewards, its investors must report their pro-rata share of the underlying income on their personal income tax return.

 

In addition, for U.S. federal income tax purposes, gains or losses are generally recognized when an investor sells shares of the ETP, with tax rates based on whether shares are held for more than one year or for one year or less.

i
For U.S. federal income tax purposes, gains or losses are generally recognized when an investor sells shares of a crypto ETP.

Futures-based crypto ETPs

 

These offer crypto exposure through regulated futures contracts, rather than directly holding crypto. Because the underlying assets are futures contracts, these products inherit the tax characteristics of Section 1256 contracts, including annual mark-to-market treatment and blended capital gains rates.6,7 As a result, investors may recognize taxable income in years when they did not sell shares and may even owe taxes in years when the fund’s share price declined.

 

What about publicly traded “crypto equities”? Stocks of companies such as crypto miners, exchanges, infrastructure providers and companies that hold large crypto treasuries are taxed just like any other public stock under U.S. federal tax law.8

Crypto tax mitigation strategies

While crypto taxes cannot be avoided, thoughtful planning may help to reduce tax drag. Strategies to consider include:

  • Holding crypto for more than one year to potentially benefit from the long term capital gains tax rate on any capital gains.3
  • Realizing capital losses in order to potentially help offset capital gains elsewhere in your portfolio, through a process known as tax-loss harvesting, subject to certain capital loss limitations.9
  • Being mindful about trading frequency, as high turnover increases short-term capital gains and tax-reporting complexity.

Bottom line

Cryptocurrency may be a relatively new phenomenon, but the tax system is not.

 

Whether you’re trading tokens in a wallet, buying futures, investing through ETPs, or owning shares of companies in the crypto industry, the IRS expects consistent reporting grounded in familiar principles. Understanding those principles—and choosing your exposure intentionally—can mean the difference between confident investing and an unpleasant surprise at tax time.

 

In crypto, as in investing more broadly, the smart move is often the least flashy one: knowing the rules first.  Consult with your tax advisor to better understand the tax treatment of your digital assets and how to translate crypto activity into accurate reporting to the IRS.  

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Article Footnotes

1 IRS Notice 2014-21, Virtual Currency Guidance: https://www.irs.gov/pub/irs-drop/n-14-21.pdf

2 IRS Publication 551: https://www.irs.gov/pub/irs-pdf/p551.pdf

3 IRS Publication 544: https://www.irs.gov/publications/p544

4 IRS Notice 2014-21, Q&A 8 and Q&A 9 (income recognition): https://www.irs.gov/pub/irs-drop/n-14-21.pdf

5 IRS, Frequently Asked Questions on Virtual Currency Transactions, Q38: irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-digital-asset-transactions

6 Internal Revenue Code §1256

7 IRS Publication 550, Investment Income and Expenses (Section 1256 contacts): https://www.irs.gov/forms-pubs/about-publication-550

8 Based on IRS guidance that investment property such as stocks is a capital assert and gains or losses from its sale are capital gains or losses. See: IRS, Topic No. 409: Capital Gains and Losses, (Jan. 5, 2026): https://www.irs.gov/taxtopics/tc409

9 Internal Revenue Code §1211 and §1212 (capital loss limitation)

Disclosures:

Virtual Currency Products (Cryptocurrencies)

Buying, selling, and transacting in Bitcoin, Ethereum or other digital assets (“Digital Assets”), and related funds and products, is highly speculative and may result in a loss of the entire investment. Risks and considerations include but are not limited to:

- Digital Assets have only been in existence for a short period of time and historical trading prices for Digital Assets have been highly volatile. The price of Digital Assets could decline rapidly, and investors could lose their entire investment.

- Certain Digital Asset funds and products, allow investors to invest on a more frequent basis than investors may withdraw from the fund or product, and interests in such funds or products are generally not freely transferrable.  This means that, particularly given the volatility of Digital Assets, an investor will have to bear any losses with respect to its investment for an extended period of time and will not be able to react to changes in the price of the Digital Asset once invested (for example, by seeking to withdraw) as quickly as when making the decision to invest.  Such Digital Asset funds and products, are intended only for persons who are able to bear the economic risk of investment and who do not need liquidity with respect to their investments.

- Given the volatility in the price of Digital Assets, the net asset value of a fund or product that invests in such assets at the time an investor’s subscription for interests in the fund or product is accepted may be significantly below or above the net asset value of the product or fund at the time the investor submitted subscription materials.

- Certain Digital Assets are not intended to function as currencies but are intended to have other use cases.  These other Digital Assets may be subject to some or all of the risks and considerations set forth herein, as well as additional risks applicable to such Digital Assets.  Buyers, sellers and users of such Digital Assets should thoroughly familiarize themselves with such risks and considerations before transacting in such Digital Assets.

- The value of Digital Assets may be negatively impacted by future legal and regulatory developments, including but not limited to increased regulation of such Digital Assets.  Any such developments may make such Digital Assets less valuable, impose additional burdens and expenses on a fund or product investing in such assets or impact the ability of such a fund or product to continue to operate, which may materially decrease the value of an investment therein.

- Due to the new and evolving nature of digital currencies and the absence of comprehensive guidance, many significant aspects of the tax treatment of Digital Assets are uncertain.  Prospective investors should consult their own tax advisors concerning the tax consequences to them of the purchase, ownership and disposition of Digital Assets, directly or indirectly through a fund or product, under U.S. federal income tax law, as well as the tax law of any relevant state, local or other jurisdiction.

- Over the past several years, certain Digital Asset exchanges have experienced failures or interruptions in service due to fraud, security breaches, operational problems or business failure.  Such events in the future could impact any fund’s or product’s ability to transact in Digital Assets if the fund or product relies on an impacted exchange and may also materially decrease the price of Digital Assets, thereby impacting the value of your investment, regardless of whether the fund or product relies on such an impacted exchange.

- Although any Digital Asset product and its service providers have in place significant safeguards against loss, theft, destruction and inaccessibility, there is nonetheless a risk that some or all of a product’s Digital Asset could be permanently lost, stolen, destroyed or inaccessible by virtue of, among other things, the loss or theft of the “private keys” necessary to access a product’s Digital Asset.

- Investors in funds or products investing or transacting in Digital Assets may not benefit to the same extent (or at all) from “airdrops” with respect to, or “forks” in, a Digital Asset’s blockchain, compared to investors who hold Digital Assets directly instead of through a fund or product.  Additionally, a “fork” in the Digital Asset blockchain could materially decrease the price of such Digital Asset.

- Digital Assets are not legal tender, and are not backed by any government, corporation or other identified body, other than with respect to certain digital currencies that certain governments are or may be developing now or in the future. No law requires companies or individuals to accept digital currency as a form of payment (except, potentially, with respect to digital currencies developed by certain governments where such acceptance may be mandated). Instead, other than as described in the preceding sentences, Digital Asset products’ use is limited to businesses and individuals that are willing to accept them. If no one were to accept digital currencies, virtual currency products would very likely become worthless.

- Platforms that buy and sell Digital Assets can be hacked, and some have failed. In addition, like the platforms themselves, digital wallets can be hacked, and are subject to theft and fraud. As a result, like other investors have, you can lose some or all of your holdings of Digital Assets.

- Unlike US banks and credit unions that provide certain guarantees of safety to depositors, there are no such safeguards provided to Digital Assets held in digital wallets by their providers or by regulators.

- Due to the anonymity Digital Assets offer, they have known use in illegal activity, including drug dealing, money laundering, human trafficking, sanction evasion and other forms of illegal commerce. Abuses could impact legitimate consumers and speculators; for instance, law enforcement agencies could shut down or restrict the use of platforms and exchanges, limiting or shutting off entirely the ability to use or trade Digital Asset products.

- Digital Assets may not have an established track record of credibility and trust. Further, any performance data relating to Digital Asset products may not be verifiable as pricing models are not uniform.

- Investors should be aware of the potentially increased risks of transacting in Digital Assets relating to the risks and considerations, including fraud, theft, and lack of legitimacy, and other aspects and qualities of Digital Assets, before transacting in such assets.

- The exchange rate of virtual currency products versus the USD historically has been very volatile and the exchange rate could drastically decline. For example, the exchange rate of certain Digital Assets versus the USD has in the past dropped more than 50% in a single day. Other Digital Assets may be affected by such volatility as well.

- Digital Asset exchanges have limited operating and performance histories and are not regulated with the same controls or customer protections available to more traditional exchanges transacting equity, debt, and other assets and securities. There is no assurance that a person/exchange who currently accepts a Digital Asset as payment will continue to do so in the future.

- The regulatory framework of Digital Assets is evolving, and in some cases is uncertain, and Digital Assets themselves may not be governed and protected by applicable securities regulators and securities laws, including, but not limited to, Securities Investor Protection Corporation coverage, or other regulatory regimes.  

- Morgan Stanley Smith Barney LLC or its affiliates (collectively, “Morgan Stanley”) may currently, or in the future, offer or invest in Digital Asset products, services or platforms.  The proprietary interests of Morgan Stanley may conflict with your interests.

- The foregoing list of considerations and risks are not and do not purport to be a complete enumeration or explanation of the risks involved in an investment in any product or fund investing or trading in Digital Assets.  

Investing in foreign markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. Investing in currency involves additional special risks such as credit, interest rate fluctuations, derivative investment risk, and domestic and foreign inflation rates, which can be volatile and may be less liquid than other securities and more sensitive to the effect of varied economic conditions. In addition, international investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets and frontier markets, since these countries may have relatively unstable governments and less established markets and economies.

Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention.

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Companies paying dividends can reduce or cut payouts at any time.

An investment in an exchange-traded fund involves risks similar to those of investing in a broadly based portfolio of equity securities traded on an exchange in the relevant securities market, such as market fluctuations caused by such factors as economic and political developments, changes in interest rates and perceived trends in stock and bond prices. Investing in an international ETF also involves certain risks and considerations not typically associated with investing in an ETF that invests in the securities of U.S. issues, such as political, currency, economic and market risks. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. ETFs investing in physical commodities and commodity or currency futures have special tax considerations. Physical commodities may be treated as collectibles subject to a maximum 28% long-term capital gains rates, while futures are marked-to-market and may be subject to a blended 60% long- and 40% short-term capital gains tax rate. Rolling futures positions may create taxable events. For specifics and a greater explanation of possible risks with ETFs¸ along with the ETF’s investment objectives, charges and expenses, please consult a copy of the ETF’s prospectus.  Investing in sectors may be more volatile than diversifying across many industries. The investment return and principal value of ETF investments will fluctuate, so an investor’s ETF shares (Creation Units), if or when sold, may be worth more or less than the original cost.  ETFs are redeemable only in Creation Unit size through an Authorized Participant and are not individually redeemable from an ETF.

Please consider the investment objectives, risks, charges and expenses of the fund(s) carefully before investing. The prospectus contains this and other information about the fund(s). To obtain a prospectus, contact your financial advisor. Please read the prospectus carefully before investing.

The spot cryptocurrency ETPs are not registered investment companies under the Investment Company Act of 1940, and therefore are not subject to the same regulatory requirements as mutual funds or traditional exchange traded funds. Shareholders do not have the same regulatory protections associated with registered investment companies

Derivatives and Leverage. Derivatives are financial contracts whose value depends on the value of underlying assets, reference rates or indices.  The use of derivatives involves risks that are in addition to, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets.  These include imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the underlying asset, and risks that the transactions may not be liquid.  Certain derivative transactions may give rise to a form of leverage, which can magnify the potential for gain and/or the risk of loss and could thus have a disproportionate impact on the performance of the fund. Leverage associated with derivative transactions may cause a fund to liquidate portfolio positions to satisfy its obligations when it may not be advantageous to do so, or may cause a fund to be more volatile than if it had not been leveraged.  Commonly used derivative instruments and techniques include:

Futures. A futures contract is a standardized, exchange-traded agreement to buy or sell a specific quantity of an underlying instrument or commodity at a specific price at a specific future time. Futures contracts may be offered on agricultural commodities,  energy commodities such as crude oil and natural gas, as well as on a vast array of financial instruments, including currencies, government securities, and stock indices. In addition to the derivatives risks discussed above, the prices of futures can be highly volatile.  They are affected by many factors, including changes in overall market movements, speculation, real or perceived inflationary trends, index volatility, changes in interest rates or currency exchange rates and political events.  Using futures can lower total return, and the potential loss from futures can exceed a fund’s initial investment in such contracts.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. Technology stocks may be especially volatile. Risks applicable to companies in the energy and natural resources sectors include commodity pricing risk, supply and demand risk, depletion risk and exploration risk.

Alternative investments often are speculative and include a high degree of risk. Investors could lose all or a substantial amount of their investment. Alternative investments are appropriate only for eligible, long-term investors who are willing to forgo liquidity and put capital at risk for an indefinite period of time. They may be highly illiquid and can engage in leverage and other speculative practices that may increase the volatility and risk of loss. Alternative Investments typically have higher fees than traditional investments. Investors should carefully review and consider potential risks before investing. Certain of these risks may include but are not limited to: Loss of all or a substantial portion of the investment due to leveraging, short-selling, or other speculative practices; Lack of liquidity in that there may be no secondary market for a fund; Volatility of returns; Restrictions on transferring interests in a fund; Potential lack of diversification and resulting higher risk due to concentration of trading authority when a single advisor is utilized; Absence of information regarding valuations and pricing; Complex tax structures and delays in tax reporting; Less regulation and higher fees than mutual funds; and Risks associated with the operations, personnel, and processes of the manager. Further, opinions regarding Alternative Investments expressed herein may differ from the opinions expressed by Morgan Stanley Wealth Management and/or other businesses/affiliates of Morgan Stanley Wealth Management.

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