How Crypto, Stocks, and Forex Are Taxed & Why the IRS Treats Them So Differently

How Crypto, Stocks, and Forex Are Taxed, & Why the IRS Treats Them So Differently

If you invest or trade in crypto, stocks, or foreign currency, you already know one thing for sure: the tax rules aren’t exactly intuitive. Even though all three can generate gains and losses, the IRS places them in completely different buckets.

This breakdown explains the why behind those rules and what traders should understand before filing their next return.

Crypto vs Stocks: Similar, but Not the Same

On paper, crypto and stocks look somewhat alike from a tax perspective. That’s because the IRS classifies both as property, not currency.

With that in mind, a few rules apply to both:

1) They follow capital gains rules

Whenever you sell, trade, or otherwise dispose of the asset, you trigger a capital gain or loss.

2) Short-term vs long-term makes a big difference

• Less than 12 months held → taxed as short-term (same as ordinary income)

• More than 12 months → taxed at long-term capital gains rates
  (Same structure as stock investing.)

3) You must track your cost basis

This applies to every share, token, or unit you sell.

Where Crypto Breaks Away From Stocks

Even though the IRS calls both “property,” this is where the similarities end.

1. Crypto is not subject to wash-sale rules

Stocks are — which means you can’t sell a losing stock and then buy it back within 30 days to claim the loss.

Crypto? Different story.

Since crypto isn’t included in the wash-sale statute, traders can harvest losses more freely. This could change in the future, but for now, it’s a major tax advantage.

2. Crypto-to-crypto swaps are taxable

Trading BTC for ETH or swapping into a new token is a taxable event.

Stock-to-stock swaps don’t work that way unless you’re in a very specific corporate reorganization.

3. Some crypto income is taxed as ordinary income

These activities aren’t treated like investment gains:

• Staking rewards

• Mining rewards

• Airdrops

• Interest from lending platforms

• Some DeFi yield

  
  

Any tokens earned become income on the day you receive them and also set your cost basis going forward.

Why Forex Is Treated in Its Own Category

Forex is an entirely different world because foreign currency trading was originally considered a business function, not a traditional investment.

The IRS uses two main sections of the tax code here:

• Section 988 (default for most traders)

• Section 1256 (optional for certain futures contracts)

1. Section 988: The Default Rule for Forex Traders

Most retail spot FX trades fall under §988 and are taxed as ordinary income or ordinary loss.

Key things to know:

• Gains and losses are ordinary

• Losses are fully deductible against ordinary income

• No $3,000 capital loss limitation

• Applies to spot trades, forwards, and many swaps

For traders who expect volatility or potential losses, §988 can actually work in their favor.

2. Section 1256: The 60/40 Capital Gains Split

If you’re trading regulated currency futures (for example, contracts on the CME), you may be able to elect §1256 treatment.

Benefits include:

• 60% long-term capital gain

• 40% short-term capital gain

• Applied no matter how long you held the position

• Mark-to-market at year-end

• Ability to carry losses back three years

This treatment is often preferred by high-volume futures traders, but retail forex platforms don’t automatically qualify — you must make the election correctly.

Why The IRS Even Created Separate Forex Rules

A few big reasons:

1. Currency isn't a capital asset

Foreign currency is considered cash. Historically these rules were built for companies dealing with:

• Imports/exports

• Hedging foreign revenue

• International loans

• Treasury operations

When retail FX trading became popular, people were simply pushed into the existing system.

2. Futures markets lobbied for favorable treatment

Back in the 1980s, Congress created §1256 to help futures markets grow by offering more attractive tax rates.

3. Businesses needed consistency

Companies hedging international operations needed predictable rules for gains and losses — so ordinary income treatment made sense.

Quick Comparison: How Each Asset is Taxed

So Which Is Best for Traders?

It really depends on your goals and trading style.

Crypto Traders

• Pro: Very flexible for tax-loss harvesting

• Con: Reporting can get messy fast, especially with frequent swaps

Stock Traders

• Pro: Cleaner reporting, well-defined tax rules

• Con: Limited to a $3,000 net capital loss deduction each year

Forex Traders

• Pro: §988 allows full ordinary loss deductions

• Pro: §1256 provides favorable blended rates

• Con: Complex rules that vary depending on your broker and election timing

Final Thoughts

The biggest mistake we see traders make is assuming all investment gains are taxed the same way. They’re not! And choosing the wrong treatment (especially with forex) can change your tax bill significantly.

If you trade:

• Crypto

• Stocks

• Forex

• Or a combination of all three

…it pays to review your strategy before year-end rather than waiting until tax season.

Pinnacle 1 Tax Advisors can walk you through the best approach for your situation and help ensure you’re saving as much as legally possible.