Cecily Zamora
Bitcoin and other cryptocurrencies are considered property by the IRS and are therefore subject to capital gains and income tax. This means that selling, using, or mining Bitcoin can trigger crypto taxes. The tax you pay depends on how and when you acquired the Bitcoin, and how long you held it for. If you acquired Bitcoin from mining or as payment for goods or services, that value is taxable as soon as you receive it. If you then sell or trade your Bitcoin, you will need to pay taxes on any profit you make.
| Characteristics | Values |
|---|---|
| How Bitcoin is treated for tax purposes | As property, not currency |
| Taxing body | Internal Revenue Service (IRS) |
| Tax forms | 1099-DA, 1040, 8949, 709, W-9, W-8 |
| Taxable events | Selling, exchanging, disposing of Bitcoin, mining, receiving as payment, staking, receiving as a reward or award, receiving from a hard fork |
| Taxable income thresholds (2023) | $44,625 (single/married filing separately), $89,250 (married filing jointly), $59,750 (head of household) |
| Tax rates | Short-term capital gains (held <1 year): 10% to 37% income tax; Long-term capital gains (held >1 year): 0%, 15%, or 20% |
| Tax calculation methods | FIFO, HIFO, Specific Identification, Average Cost |
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What You'll Learn
Bitcoin is taxed as property, not currency
Bitcoin is taxed, but how it is taxed depends on how and when you acquired it. In 2014, the IRS issued a notice explaining that virtual currency is treated as property for federal income tax purposes. This means that general tax principles applicable to property transactions also apply to transactions using virtual currency. For U.S. tax purposes, digital assets like Bitcoin are considered property, not currency.
The tax definition of a digital asset is any digital representation of value recorded on a cryptographically secured, distributed ledger (blockchain) or similar technology. A digital asset that has an equivalent value in real currency or acts as a substitute for real currency is referred to as a convertible virtual currency, for example, a cryptocurrency.
Bitcoin is subject to capital gains and income tax. Capital gains occur when you sell or exchange Bitcoin for more than its purchase price, while capital losses occur when you sell for less. These must be reported on your tax return. Gains are taxed, while losses can offset other gains and up to $3,000 of other income.
If you acquired Bitcoin from mining or as payment for goods or services, that value is taxable immediately, like earned income. You don't wait to sell, trade or use it before settling up with the IRS. If you disposed of or used Bitcoin by cashing it on an exchange, buying goods and services, or trading it for another cryptocurrency, you will owe taxes if the realized value is greater than the price at which you acquired the crypto.
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Income from mining is taxable
Bitcoin is considered a property by the IRS, and therefore, it is subject to capital gains and income tax. This means that any income from Bitcoin mining is taxable. The IRS considers Bitcoin mining rewards as taxable income, and miners are required to declare this income as self-employment or miscellaneous income. This income is based on the value of the Bitcoin when it is received.
Miners can, however, deduct related expenses, such as equipment and electricity, from their taxable income. It is important to note that the tax treatment of Bitcoin and other cryptocurrencies can vary depending on the specific circumstances and how the Bitcoin was acquired. For example, if you acquired Bitcoin through mining, the value is taxable immediately as earned income. On the other hand, if you dispose of or use Bitcoin by cashing it in on an exchange or buying goods and services, you will owe taxes if the realized value is greater than the acquisition price.
It is important to accurately report income from Bitcoin mining to avoid penalties and accrued interest. The IRS provides specific forms for reporting income from digital assets, such as Form 1040 (Schedule 1) for income from mining. Additionally, beginning in 2025, crypto brokers like Coinbase will be required to report gross proceeds from crypto sales and exchanges on Form 1099-DA. This will help individuals calculate their taxable gains or losses and simplify the process of filing tax returns.
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Capital gains and losses must be reported
The IRS treats Bitcoin and other cryptocurrencies as property, making them subject to capital gains and income tax. Capital gains and losses must be reported on your tax return.
Capital gains occur when you sell or exchange Bitcoin for more than its purchase price, while capital losses occur when you sell for less. If you sell Bitcoin for a profit, you are taxed on the difference between your purchase price and the proceeds of the sale. This is the case even if you exchange your Bitcoin for another cryptocurrency, or use it to pay for goods or services.
To calculate your capital gains, find the cost basis and fair market value (FMV) at the time of the taxable event (e.g. selling or trading). The cost basis is the original value of your cryptocurrency when you acquired it, plus any associated costs like fees. The formula for calculating capital gains is: proceeds from the sale minus the cost basis.
For example, if you bought 1 Bitcoin for $33,660 (including a 2% fee) and sold it for $60,000, your capital gain would be $26,340 ($60,000 - $33,360). If held for less than a year, this gain is taxed at the short-term rate, the same as your income tax rate (10% to 37%). If held for more than a year, this gain is taxed at the long-term rate (0%, 15%, or 20%), depending on your income.
It is important to note that capital losses can offset capital gains and reduce your tax liability. Additionally, if your total taxable income is below certain thresholds, you may pay no tax on capital gains.
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Taxable gains/losses are calculated using cost basis
In the US, Bitcoin is taxed as property. This means that selling, trading, or disposing of Bitcoin can trigger a taxable event. The tax treatment of Bitcoin transactions depends on how the Bitcoin was acquired and the length of time it was held.
When calculating taxable gains/losses from Bitcoin transactions, the cost basis and fair market value (FMV) at the time of the transaction are essential. The cost basis is the original purchase price of the Bitcoin, while the FMV is the price at which it was sold or traded. The difference between these two values represents the taxable gain or loss.
There are several methods for calculating cost basis, including First-In-First-Out (FIFO), Last-In-First-Out (LIFO), Highest-In-First-Out (HIFO), and Specific Identification. FIFO assumes that the first Bitcoin purchased is the first one sold, while LIFO assumes the opposite. HIFO selects the highest-cost Bitcoin units for sale first, and Specific Identification involves meticulous accounting to identify the buying price of each token sold. The choice of method can impact the tax liability, and it is recommended to consult a tax professional for guidance.
It is important to maintain detailed records of all Bitcoin transactions, including dates, amounts, costs, and sales proceeds. Inaccurate reporting can lead to penalties, interest, and audits. Properly calculating and reporting gains or losses is crucial for compliance with tax regulations.
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Taxpayers must report crypto transactions
Taxpayers in the US must report crypto transactions as digital assets are treated as property for tax purposes. This means that general property tax principles apply to any transactions involving digital assets. Taxpayers who owned digital assets in 2023 but did not engage in any transactions involving those assets can check the "No" box on their tax forms. However, if a taxpayer disposed of any digital asset by gift, they may need to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
If a taxpayer received digital assets as payment for property or services, as a reward or award, from mining, staking or similar activities, or as a result of a hard fork, they must check the "Yes" box. Additionally, if they disposed of digital assets in exchange for property or services, or in exchange or trade for another digital asset, they must also check the "Yes" box and report all income related to their digital asset transactions. For example, an investor who sold, exchanged or transferred a digital asset during 2023 must use Form 8949, Sales and Other Dispositions of Capital Assets, to figure out their capital gain or loss on the transaction and then report it.
It is important to note that the tax definition of a digital asset is any digital representation of value recorded on a cryptographically secured, distributed ledger (blockchain) or similar technology. This includes cryptocurrencies such as Bitcoin, which are viewed as property from a tax perspective. As such, any gains from selling, using or mining Bitcoin are subject to crypto taxes. These gains can be calculated by finding the cost basis and fair market value (FMV) at the time of the taxable event, such as selling or trading.
Starting in 2025, crypto brokers like Coinbase are required to report the gross proceeds from crypto sales and exchanges on a new tax form called the 1099-DA. This form provides a clear record of the proceeds from transactions, helping taxpayers calculate taxable gains or losses. From 2026 onwards, brokers will also report the cost basis, which is the original value of the cryptocurrency when it was acquired, plus any associated costs.
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Frequently asked questions
Bitcoin is taxed as property, meaning it is subject to capital gains and income tax.
Capital gains occur when you sell or exchange Bitcoin for more than its purchase price. These must be reported on your tax return and are taxed.
To calculate your capital gains, find the cost basis and fair market value (FMV) at the time of the taxable event (e.g. selling or trading). Use the formula: Common methods for calculating cost basis include FIFO, HIFO, Specific Identification, and Average Cost.
Losses from Bitcoin transactions can offset gains and reduce your tax liability. Capital losses can also offset other gains and up to $3,000 of other income.
Income from Bitcoin mining is taxable and should be declared as self-employment or miscellaneous income. Miners can deduct related expenses like equipment and electricity.
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