Long-Term vs Short-Term Crypto Taxes: Capital Gains Guide 2026

The difference between long-term and short-term capital gains taxes could mean thousands of dollars saved or lost on your crypto portfolio. Understanding this distinction is one of the most powerful tax optimization strategies available to cryptocurrency investors.

Here’s the reality: selling Bitcoin you’ve held for 11 months versus 13 months can result in dramatically different tax bills. At the highest income levels, you might pay 37% tax on short-term gains versus just 20% on long-term gains. That’s nearly double the tax rate for the same profit.

In this comprehensive guide, we’ll break down everything you need to know about crypto holding periods, tax rates, and strategies to minimize your tax burden legally.

What Qualifies as Long-Term vs Short-Term Crypto Gains

The IRS treats cryptocurrency as property, which means the same capital gains rules that apply to stocks and real estate apply to your Bitcoin, Ethereum, and altcoins.

The One-Year Rule

The distinction is straightforward:

Short-term capital gains: Profits from selling crypto held for one year or less

Long-term capital gains: Profits from selling crypto held for more than one year

The key phrase here is “more than one year.” If you buy Bitcoin on January 15, 2025, you need to hold it until at least January 16, 2026, to qualify for long-term treatment. Selling on January 15, 2026, would still be considered short-term because you haven’t held it for more than a year.

How the IRS Defines Your Holding Period

Your holding period begins the day after you acquire the asset. If you purchase ETH on March 1, your holding period starts on March 2. The holding period ends on the day you sell, exchange, or dispose of the asset.

Important note: The holding period is calculated to the day, not the month or year. Tax software like Awaken Tax automatically tracks holding periods for every asset in your portfolio, ensuring you never accidentally trigger short-term gains when long-term treatment was just days away.

2026 Tax Rates: The Numbers That Matter

Understanding the actual tax rates helps you see why holding period optimization is so valuable.

Short-Term Capital Gains Tax Rates (2026)

Short-term capital gains are taxed as ordinary income, meaning they’re added to your wages, salary, and other income and taxed at your marginal rate.

Taxable Income (Single)	Taxable Income (Married Filing Jointly)	Tax Rate
$0 - $11,925	$0 - $23,850	10%
$11,926 - $48,475	$23,851 - $96,950	12%
$48,476 - $103,350	$96,951 - $206,700	22%
$103,351 - $197,300	$206,701 - $394,600	24%
$197,301 - $250,525	$394,601 - $501,050	32%
$250,526 - $626,350	$501,051 - $751,600	35%
Over $626,350	Over $751,600	37%

Long-Term Capital Gains Tax Rates (2026)

Long-term capital gains benefit from preferential rates that are significantly lower:

Taxable Income (Single)	Taxable Income (Married Filing Jointly)	Tax Rate
$0 - $48,350	$0 - $96,700	0%
$48,351 - $533,400	$96,701 - $600,050	15%
Over $533,400	Over $600,050	20%

The Real-World Impact

Let’s look at a concrete example:

Scenario: You’re a single filer with $100,000 in salary. You sell crypto for a $50,000 profit.

Short-term gain (held less than 1 year):

Your total income becomes $150,000
The $50,000 gain is taxed at 24% (your marginal bracket)
Tax on the gain: $12,000

Long-term gain (held more than 1 year):

Salary is taxed normally at ordinary rates
The $50,000 long-term gain is taxed at 15%
Tax on the gain: $7,500

Savings from waiting: $4,500 on a single transaction

For high earners with larger portfolios, these savings multiply dramatically. A $500,000 gain could mean $85,000 in tax savings by qualifying for long-term treatment.

Net Investment Income Tax (NIIT)

Don’t forget the 3.8% Net Investment Income Tax, which applies to investment income (including crypto gains) for individuals with modified adjusted gross income above:

$200,000 for single filers
$250,000 for married filing jointly

This additional tax applies to both short-term and long-term gains once you exceed these thresholds.

How the 1-Year Holding Period Works in Practice

Understanding the nuances of holding period calculation can prevent costly mistakes.

Acquisition Methods and Holding Period Start Dates

Purchasing crypto: Holding period begins the day after purchase

Receiving as payment: Holding period begins the day after receipt

Mining rewards: Holding period begins the day after the reward is received

Staking rewards: Holding period begins the day after the reward is received

Airdrops: Holding period begins the day after the airdrop is received

Hard forks: The IRS hasn’t provided definitive guidance, but conservative treatment starts the holding period when you receive the forked coin

What Resets Your Holding Period

Several actions can reset your holding period to zero:

Selling and rebuying: If you sell crypto and repurchase it, you start a new holding period
Crypto-to-crypto trades: Swapping Bitcoin for Ethereum triggers a sale of Bitcoin and starts a new holding period for Ethereum
Spending crypto: Using crypto to buy goods or services is a taxable sale
Wrapping tokens: Converting ETH to WETH may reset your holding period (guidance is evolving)

What Doesn’t Reset Your Holding Period

Transfers between your own wallets: Moving Bitcoin from Coinbase to your Ledger doesn’t affect your holding period

Changing custody: Moving from one custodian to another maintains your original holding period

Tracking all this manually is nearly impossible with an active crypto portfolio. Awaken Tax automatically tracks holding periods across all your wallets and exchanges, flagging which assets qualify for long-term treatment before you sell.

Strategies to Qualify for Long-Term Capital Gains Rates

Smart tax planning can help you minimize short-term gains and maximize long-term treatment.

Strategy 1: HODL with Purpose

The simplest strategy is to build holding into your investment thesis. Before buying any crypto:

Ask yourself if you’re willing to hold for at least one year
Plan your exit timeline before you buy
Set calendar reminders for when assets become long-term eligible

Strategy 2: Use Tax Lot Selection

When you have multiple purchases of the same cryptocurrency at different times, you can choose which specific coins you’re selling. This is called “specific identification” and can be incredibly powerful.

Example:

January 2025: Buy 1 BTC at $40,000
June 2025: Buy 1 BTC at $50,000
January 2026: Sell 1 BTC at $60,000

If you sell in January 2026 and specifically identify the January 2025 purchase, you have:

Long-term gain of $20,000 (taxed at preferential rates)

If you default to FIFO and it selects the June 2025 purchase, you have:

Short-term gain of $10,000 (taxed as ordinary income)

Even though the June purchase has a lower gain amount, the January purchase saves you more in taxes due to the favorable long-term rate.

Strategy 3: Tax-Loss Harvesting Without Resetting Winners

Sell losing positions to realize losses while keeping your long-term winners intact. The losses offset your gains while your winning positions continue to age toward long-term treatment.

Strategy 4: Income Timing

If you’re close to crossing into a higher tax bracket, consider:

Deferring sales to the next tax year
Splitting large sales across two tax years
Timing sales when your income is lower (sabbatical, career transition, retirement)

Strategy 5: Gifting Strategy

If you want to gift crypto to family members in lower tax brackets:

The recipient inherits your holding period
They can sell at their lower tax rate
Annual gift exclusion is $18,000 per person in 2026

Important: Don’t use this strategy artificially with intent to repurchase, as the IRS may challenge the arrangement.

Impact on Different Income Levels

Your income level dramatically affects how valuable long-term treatment is.

Low-Income Earners: The 0% Rate Opportunity

If your taxable income (including the capital gain) stays below $48,350 (single) or $96,700 (married filing jointly), you pay 0% tax on long-term capital gains.

Strategy: If you have a year with low income (student, between jobs, early retirement), consider harvesting long-term gains tax-free.

Example: A single person with $30,000 in income could realize up to $18,350 in long-term capital gains completely tax-free.

Middle-Income Earners: The 15% Sweet Spot

Most middle-income earners fall into the 15% long-term capital gains bracket, which is significantly better than the 22-32% ordinary income rates they’d pay on short-term gains.

The math: On a $20,000 gain, long-term treatment saves $1,400-$3,400 compared to short-term.

High-Income Earners: Maximum Savings Potential

High earners see the biggest dollar savings from long-term treatment:

Short-term rate: Up to 37% Long-term rate: 20% Plus NIIT: 3.8%

A high earner with $200,000 in crypto gains saves $34,000 or more by qualifying for long-term treatment.

State Tax Considerations

Federal taxes are only part of the picture. State taxes can significantly impact your total tax bill.

States with No Capital Gains Tax

These states don’t tax capital gains at all:

Alaska
Florida
Nevada
New Hampshire (interest and dividends only)
South Dakota
Tennessee (interest and dividends only)
Texas
Washington (no income tax, but has a capital gains tax on high earners)
Wyoming

States That Tax Capital Gains as Ordinary Income

Most states tax capital gains at the same rate as ordinary income, including:

California (up to 13.3%)
New York (up to 10.9%)
New Jersey (up to 10.75%)
Hawaii (up to 11%)

States with Preferential Long-Term Rates

A few states offer lower rates for long-term capital gains:

Arizona
Arkansas
Montana
New Mexico
North Dakota
South Carolina
Wisconsin

Planning Implications

For high-value crypto portfolios, state residency can have a massive impact. Someone selling $1 million in crypto gains in California faces $133,000 in state taxes alone, while the same sale in Florida incurs $0 state tax.

Note: Changing residency to avoid taxes requires actually moving and establishing genuine domicile. The IRS and state tax authorities scrutinize these changes carefully.

FIFO vs LIFO: Impact on Holding Periods

Your cost basis method determines which coins are considered sold, directly impacting whether gains are short-term or long-term.

FIFO (First In, First Out)

With FIFO, your oldest coins are sold first. This tends to result in more long-term gains over time because:

Your oldest purchases are sold first
These are more likely to have been held over a year
Over time, your portfolio naturally ages into long-term status

Best for: Long-term holders who want to maximize long-term capital gains treatment

LIFO (Last In, First Out)

With LIFO, your newest coins are sold first. This method:

Often results in short-term gains
Can minimize gains if recent purchases were at higher prices
Preserves your oldest, lowest-cost-basis coins

Best for: Situations where minimizing the gain amount is more important than getting long-term treatment

HIFO (Highest In, First Out)

HIFO sells your highest-cost-basis coins first:

Minimizes capital gains regardless of holding period
May result in more short-term gains
Best for pure gain minimization

Best for: High-income earners where minimizing total gain amount beats optimizing for long-term rates

Which Method Is Best?

There’s no universal answer. Awaken Tax lets you compare all three methods and shows you exactly how each affects your tax bill. You might be surprised that sometimes FIFO saves more taxes than HIFO, or vice versa, depending on your specific situation.

Use our crypto tax calculator to model different scenarios with your actual portfolio data.

Specific Identification Method

The most powerful cost basis method is specific identification, which lets you choose exactly which coins you’re selling.

How It Works

Instead of using a default ordering method, you specifically identify which tax lot you’re disposing of for each sale. This requires:

Adequate records: Documentation of each purchase (date, amount, cost)
Clear identification: At the time of sale, you must identify which specific units you’re selling
Consistent application: Follow the identification method you’ve chosen

IRS Requirements

The IRS requires that you adequately identify which units are sold at the time of the transaction. For crypto, this typically means:

Noting the specific wallet and transaction hash of the original purchase
Documentation showing which units were designated for sale
Consistent record-keeping across all transactions

Rev. Proc. 2024-28 Implications

Starting in 2025, the IRS requires per-wallet cost basis tracking. This means:

Each wallet is treated as a separate pool
You can still use specific identification within each wallet
Transferring between wallets requires careful basis tracking

This is exactly why comprehensive tax software is essential. Awaken Tax handles Rev. Proc. 2024-28 compliance automatically, tracking specific lots across all your wallets.

DeFi Complications: LP Tokens, Staking, and More

DeFi creates unique challenges for holding period calculations.

Liquidity Pool (LP) Tokens

When you deposit tokens into a liquidity pool:

Deposit: You swap your tokens for LP tokens - this may trigger a taxable event and start a new holding period for the LP tokens
Holding: Your LP token holding period runs while deposited
Withdrawal: You swap LP tokens back for underlying tokens - another potential taxable event with a new holding period

The problem: Even if you held your original ETH for 2 years, depositing it into a liquidity pool may start a new holding period for the LP tokens. When you withdraw, you start yet another new holding period for the tokens received.

Staking Rewards

Staking rewards are generally treated as income when received, and:

Your holding period starts when you receive the rewards
To get long-term treatment, you must hold the reward tokens for over one year
Continuous reward accrual means you have many small positions with different holding periods

Yield Farming

Yield farming typically involves multiple transactions that reset holding periods:

Depositing tokens
Receiving receipt tokens
Earning reward tokens
Harvesting rewards
Withdrawing and receiving tokens back

Each step may start a new holding period for the assets received.

Wrapped Tokens and Liquid Staking

The tax treatment of wrapping tokens (ETH to WETH) or liquid staking (ETH to stETH) is still evolving:

Conservative treatment: Each conversion is a taxable event that resets the holding period

Aggressive treatment: These are like-kind or non-taxable events that maintain the holding period

Given IRS uncertainty, most tax professionals recommend the conservative approach.

Tracking DeFi Holding Periods

Manual tracking of DeFi holding periods across thousands of transactions is virtually impossible. This is exactly why Awaken Tax built support for 10,000+ DeFi protocols. The platform automatically:

Tracks holding periods through complex DeFi transactions
Identifies which LP positions are approaching long-term status
Categorizes staking rewards by acquisition date
Handles wrapped tokens and liquid staking derivatives

Tax Planning Strategies: Putting It All Together

Now let’s combine everything into actionable strategies.

Strategy 1: The Holding Period Dashboard

Before selling anything, know exactly where you stand:

Import all wallets and exchange accounts into Awaken Tax
Review which positions are long-term eligible
Check which positions are approaching the 1-year mark
Prioritize selling long-term positions when possible

Strategy 2: Tax Bracket Management

Calculate your expected income for the year and plan sales accordingly:

Stay under 0% long-term threshold if possible
Avoid pushing into the next tax bracket with short-term gains
Consider deferring large sales if you expect lower income next year

Strategy 3: Harvest Losses to Offset Short-Term Gains

If you must realize short-term gains:

Identify positions with losses
Sell losing positions to realize losses
Use losses to offset the short-term gains
Short-term losses offset short-term gains first

Strategy 4: Stack Long-Term Positions

When buying crypto you intend to hold:

Buy in defined lots with clear dates
Avoid unnecessary transactions that reset holding periods
When DeFi-ing, consider the holding period impact
Use specific identification to sell highest-basis, longest-held lots first

Strategy 5: Year-End Planning

In November and December:

Review unrealized gains and losses
Calculate your estimated tax liability
Consider realizing losses before year-end
Defer gains to January if beneficial
Check if any positions will cross the 1-year threshold in January

Strategy 6: Portfolio Rebalancing with Taxes in Mind

When rebalancing:

Prioritize selling long-term positions
Consider partial sales to stay long-term
Use new contributions to rebalance rather than selling
Track the tax impact before executing trades

Common Mistakes to Avoid

Mistake 1: Not Tracking Holding Periods

Many investors don’t realize they’re selling short-term until they file taxes and owe more than expected. Use software that tracks this automatically.

Mistake 2: Ignoring the Date

Selling crypto on day 365 instead of day 366 costs you the long-term rate. Always verify your holding period before selling.

Mistake 3: Assuming Crypto-to-Crypto Swaps Don’t Count

Every swap is a taxable event that starts a new holding period. That quick swap from BTC to ETH resets your holding period to zero.

Mistake 4: Forgetting DeFi Impact

Using DeFi protocols can reset holding periods you thought were intact. Understand the implications before depositing into pools or staking.

Mistake 5: Using the Wrong Cost Basis Method

Defaulting to FIFO isn’t always optimal. Compare methods before choosing.

Tools for Tracking and Optimization

Managing all this complexity manually is essentially impossible for active crypto users. Here’s what to look for in tax software:

Automatic holding period tracking across all wallets and exchanges
Cost basis method comparison to see which method saves the most
DeFi protocol support that correctly handles LP tokens and staking
Rev. Proc. 2024-28 compliance for per-wallet basis tracking
Tax-loss harvesting tools to identify opportunities

Awaken Tax offers all these features and supports over 10,000 DeFi protocols. Most users complete their crypto taxes in under an hour.

Visit our comparison page to see how different tax platforms stack up, or use our crypto tax calculator to estimate your potential tax savings from holding period optimization.

Final Thoughts

The difference between short-term and long-term capital gains is one of the most significant tax optimization opportunities available to crypto investors. At the highest income levels, you could cut your tax rate nearly in half simply by holding assets for more than one year.

Key takeaways:

Short-term gains are taxed at ordinary income rates (up to 37%)
Long-term gains are taxed at preferential rates (0%, 15%, or 20%)
The holding period is exactly more than one year - not “about a year”
Your cost basis method (FIFO, LIFO, HIFO, specific ID) affects which coins are sold
DeFi activity can reset holding periods unexpectedly
State taxes add another layer of complexity

The complexity of tracking holding periods across multiple wallets, exchanges, and DeFi protocols makes specialized tax software essential. Awaken Tax automatically handles all of this, showing you exactly which positions qualify for long-term treatment before you sell.

Ready to optimize your crypto taxes? Get started with Awaken Tax for free and see exactly how holding periods affect your tax liability.

For a complete comparison of all crypto tax platforms, visit our comparison page. Need help estimating your taxes? Try our crypto tax calculator.