Core Tax Concepts

2.1 Same trade, different tax

Node bought bitcoin three times during the year, at different prices, then sold one bitcoin. "What's my gain?" Node asked.

"It depends on which bitcoin you sold," said Hash.

"They're all the same bitcoin!"

"To the network, yes. To the tax authority, each purchase has its own cost. Which one you're treated as selling can change your tax bill by thousands. This chapter covers the concepts that apply almost everywhere, before we get into the US and EU specifics."

2.2 Two kinds of taxable crypto activity

Most tax systems treat crypto activity in one of two broad ways:

Category	What it means	Common examples
Capital gains or losses	Profit or loss when you dispose of crypto	Selling, swapping, spending
Income	Value received as payment or reward	Staking rewards, mining, salary in crypto, some airdrops

Some activity can involve both: you may owe income tax on staking rewards when received, and then capital gains tax on any change in their value when you later sell them.

2.3 Common taxable events

Event	Often taxable as	Notes
Selling crypto for fiat	Capital gain or loss	Taxable almost everywhere crypto is taxed
Swapping one crypto for another	Capital gain or loss	Taxable in the US and many EU countries; not taxable in some, like France and Portugal (Chapter 9)
Spending crypto on goods or services	Capital gain or loss	Treated as disposing of the crypto
Receiving staking or mining rewards	Income	Timing and treatment vary (Chapters 5 and 9)
Receiving crypto as salary or payment	Income	Valued at the time received
Airdrops	Often income	Varies by country and circumstances

Usually not taxable	Notes
Buying crypto with fiat	Establishes your cost basis
Moving crypto between your own wallets	Not a disposal, but keep records to prove it's your own transfer
Holding crypto	Generally not taxed in most systems, though some countries tax wealth or deemed returns (Chapter 9)

Always confirm treatment for your jurisdiction, because the details differ.

Chapter 2 · Which events are taxable

Starting from an action, the tree branches: disposing of crypto by selling, swapping, or spending creates a capital gain or loss on the difference from cost basis; receiving crypto as payment, staking, mining, or an airdrop is income at its value when received; buying with fiat or transferring between your own wallets is not a taxable event. Rules vary by jurisdiction.

2.4 Cost basis

Your cost basis is what you paid to acquire the crypto, usually including fees. Your gain or loss is:

Gain or loss = proceeds − cost basis

	Value
Bought 0.5 ETH for $1,500, plus $10 fee	Cost basis $1,510
Sold 0.5 ETH for $2,000, minus $10 fee	Proceeds $1,990
Gain	$480

For crypto received as income, the cost basis is usually its value when you received it, the same amount you reported as income.

2.5 Which coins did you sell? Cost basis methods

When you've bought the same asset at different prices, you need a method to decide which purchase each sale comes from.

Node's purchases:

Date	Bought	Price
January	1 BTC	$40,000
March	1 BTC	$60,000
June	1 BTC	$80,000

In September, Node sells 1 BTC for $70,000.

Method	Which purchase is sold	Gain or loss
FIFO (first in, first out)	January ($40,000)	+$30,000
LIFO (last in, first out)	June ($80,000)	−$10,000
Specific identification	Whichever lot you choose and can document, for example March ($60,000)	+$10,000
Average cost	Average of all three ($60,000)	+$10,000

The same sale produces anything from a $10,000 loss to a $30,000 gain.

"So the method matters enormously," said Node.

"And you can't just pick whichever is best each time," said Hash. "Countries set rules on which methods are allowed and how consistently you must apply them. Some require FIFO. Some allow specific identification with proper records. Some use averaging formulas. Chapters 4 and 9 cover the US and EU."

Chapter 2 · Cost basis methods

Three lots bought at $40,000, $60,000, and $80,000 are partly sold at $70,000. FIFO reports a $30,000 gain using the oldest lot, LIFO a $10,000 loss using the newest, specific identification lets you choose, and average cost gives a $10,000 gain. Method choice is constrained by jurisdiction and cannot be changed freely each sale.

2.6 Holding periods

Many tax systems treat assets held for a longer time more favourably.

Jurisdiction (examples)	Holding period rule
United States	Held more than one year: lower long-term capital gains rates (Chapter 4)
Germany	Held more than one year: gains generally tax-free for private investors (Chapter 9)
Portugal	Held 365 days or more: gains generally exempt for individuals (Chapter 9)
France, Italy, Spain	No holding period benefit for crypto (Chapter 9)

Holding periods are tracked per lot, which is another reason detailed records matter.

2.7 Losses

Selling crypto at a loss can usually reduce your taxable gains, and sometimes other income, depending on the country. Rules on how losses can be used, carried forward, or restricted vary widely. In the US, for example, net capital losses can offset up to a limited amount of ordinary income per year, with the rest carried forward (Chapter 5).

2.8 Fair market value

Many calculations require the fair market value of crypto at a specific time: when you received staking rewards, swapped tokens, or were paid. Tax authorities generally expect a reasonable, consistent method, such as the price on a major exchange or a reputable data source at that time. Record the source you use.

2.9 Try it yourself

Using your own transactions, or Node's example, calculate the gain or loss on one sale using FIFO, LIFO, specific identification, and average cost. Then list every type of crypto activity you did last year and mark each as likely capital gains, income, or not taxable, to be confirmed for your jurisdiction.

Key takeaways from this chapter

1. Crypto activity is generally taxed as capital gains or losses on disposals, or as income when received as payment or rewards.
2. Selling, swapping, and spending are common taxable events; buying and moving between your own wallets usually aren't.
3. Gain or loss equals proceeds minus cost basis, usually including fees.
4. Cost basis methods, like FIFO, LIFO, specific identification, and averaging, can change your result dramatically; countries restrict which you can use.
5. Holding periods matter in some countries and not in others.
6. Loss rules and fair market value methods vary; record your sources and methods consistently.