Bitcoin Tax Rules: What You Need To Know

Bitcoin and other cryptocurrencies are taxed, but how they're taxed depends on how and when you acquired them. The Internal Revenue Service (IRS) treats cryptocurrencies as property for tax purposes, so you pay taxes on cryptocurrency if you sell or use your crypto in a transaction, and it is worth more than when you bought it. If you hold a cryptocurrency, sell it, and profit, you owe capital gains on that profit, just as you would on a share of stock. If you use crypto to buy goods or services, you owe taxes on the increased value between the price you paid and its value at the time of the transaction. If you accept crypto as payment for goods or services, you must report it as business income. If you're a miner, the value of your crypto at the time it was mined counts as income.

Capital gains taxes

The Internal Revenue Service (IRS) classifies cryptocurrency as property, and transactions involving it are taxable by law. Capital gains taxes apply to cryptocurrency sales.

If you sell Bitcoin for a profit, you're taxed on the difference between your purchase price and the proceeds of the sale. This also includes exchanging your Bitcoin directly for another cryptocurrency, and using Bitcoin to pay for goods or services.

The tax rate is 0-20% for cryptocurrency held for more than a year and 10-37% for cryptocurrency held for less than a year. The tax rate you pay depends on your income level and how long you held your crypto.

If you acquired Bitcoin from mining or as payment for goods or services, that value is taxable immediately, like earned income.

If you run a mining business, then you can make the deductions to cut down your tax bill. But you cannot make these deductions if you mined the cryptocurrencies for personal benefit.

Cryptocurrency donations are treated similarly to cash donations. They are tax-deductible, though donors face limits on how much they can deduct based on their adjusted gross income.

Income taxes

The Internal Revenue Service (IRS) has classified cryptocurrencies as property, and transactions involving them are taxable by law. This means that, in the US, Bitcoin is taxed as property by the IRS.

If you sell Bitcoin for a profit, you will be taxed on the difference between your purchase price and the proceeds of the sale. This also includes exchanging your Bitcoin directly for another cryptocurrency, and using Bitcoin to pay for goods or services. If you acquired Bitcoin from mining or as payment for goods or services, that value is taxable immediately, like earned income.

The IRS has provided specific guidance on transactions involving digital assets that are to be included in a tax return. These include:

• Sale of a digital asset for fiat
• Exchange of a digital asset for property, goods, or services
• Exchange or trade of one digital asset for another digital asset
• Receipt of a digital asset as payment for goods or services
• Receipt of a new digital asset as a result of a hard fork
• Receipt of a new digital asset as a result of mining or staking activities
• Receipt of a digital asset as a result of an airdrop
• Any other disposition of a financial interest in a digital asset
• Receipt or transfer of a digital asset for free (without providing any consideration) that does not qualify as a bona fide gift
• Transferring a digital asset as a bona fide gift if the donor exceeds the annual gift exclusion amount

The tax basis of Bitcoin used to determine your gain or loss is the cost for which the digital currency was obtained or its market price at the time it was acquired. For example, if you acquired 100,000 Satoshi when Bitcoin traded at $20,000/coin, the cost basis of the acquisition would be $20. If you then sold the Bitcoin for $25 a year later, you would have a $5 taxable capital gain.

The tax basis of Bitcoin becomes more complicated as less straightforward transactions occur. For example, an investor may receive airdropped tokens or tokens in exchange for a service at no cost. In most of these situations, the airdropped digital currencies would have a basis equal to the fair market value at the time of acquisition.

Cryptocurrency mining is also considered a taxable event. The fair market value or cost basis of the coin is its price at the time it was rewarded to you. The nature of those deductions differs based on whether you mined the cryptocurrencies for personal or business gain. If you run a mining business, then you can make the deductions to cut down your tax bill. But you cannot make these deductions if you mined the cryptocurrencies for personal benefit.

Cryptocurrency donations are treated similarly to cash donations. They are tax-deductible, though donors face limits on how much they can deduct based on their adjusted gross income. An appraiser will assign a fair market value for the coin based on its market price at the time of donation. The donor is not required to pay any taxes on the price gain.

The IRS established an annual gift tax exclusion. In 2023, taxpayers were allowed an annual exclusion per donee for a gift amount of up to $17,000. This limit was increased to $18,000 in 2024.

The only way to avoid paying Bitcoin taxes is to not sell or use any during the tax year. Receiving Bitcoin as an airdrop or in exchange for service has tax implications, but most taxable events are triggered by the sale or exchange of the cryptocurrency.

Taxable events

The IRS has provided specific guidance on transactions involving digital assets that are to be included in a tax return. Here are some examples of taxable events:

• Sale of a digital asset for fiat currency: The sale of cryptocurrency for fiat currency (e.g. US dollars) is a taxable event and must be reported. Any resulting gain or loss must be claimed.
• Exchange of a digital asset for property, goods, or services: Using cryptocurrency to pay for goods or services is a taxable event, and any gains or losses must be reported.
• Exchange or trade of one digital asset for another digital asset: Trading one cryptocurrency for another is a taxable event and must be reported, even if no fiat currency is involved in the transaction. The fair market value of the cryptocurrency at the time of the trade determines its taxable value.
• Receipt of a digital asset as payment for goods or services: If you receive cryptocurrency as payment for providing a service, this is a taxable event and must be reported.
• Receipt of a new digital asset as a result of a hard fork or mining/staking activities: A hard fork of a cryptocurrency occurs when a blockchain split occurs, resulting in a change in protocols. This creates a taxable event if new cryptocurrencies are acquired because of it. Cryptocurrency mining and staking are also considered taxable events. The fair market value or cost basis of the coin is its price at the time it is rewarded to you.
• Receipt of a digital asset as a result of an airdrop: Airdrops are generally taxed as ordinary income.
• Any other disposition of a financial interest in a digital asset: This includes transferring a digital asset as a bona fide gift if the donor exceeds the annual gift exclusion amount.

It is important to note that simply buying cryptocurrency with cash and holding it is not a taxable event. Tax liability is triggered when the crypto is sold or otherwise transferred, exchanged, or disposed of in a manner that creates a taxable event.

Tax reporting

The IRS treats cryptocurrencies as property for tax purposes. This means that you must pay taxes on cryptocurrency if you sell or use it in a transaction, and it is worth more than when you bought it. This is because you trigger capital gains or losses if its market value has changed.

If you receive cryptocurrency as payment for business purposes, it is taxed as business income. If you receive it as a reward for work done on a blockchain, it is taxed as ordinary income.

The IRS has provided specific guidance on transactions involving digital assets that must be included in a tax return. These include:

• Sale of a digital asset for fiat currency
• Exchange of a digital asset for property, goods, or services
• Exchange or trade of one digital asset for another
• Receipt of a digital asset as payment for goods or services
• Receipt of a new digital asset as a result of a hard fork or airdrop
• Receipt of a new digital asset as a result of mining or staking activities

If you hold a cryptocurrency, sell it, and make a profit, you owe capital gains tax on that profit, just like you would on a share of stock. If you use cryptocurrency to buy goods or services, you owe taxes on the increased value between the price you paid and its value at the time of the transaction, plus any other taxes triggered.

If you are a cryptocurrency miner, the value of your crypto at the time it was mined counts as income. If you are mining as a business, you can make deductions to cut down your tax bill. However, if you mined cryptocurrency for personal gain, you cannot make these deductions.

Cryptocurrency capital gains and losses are reported on IRS Form 8949, Sales and Dispositions of Capital Assets. If you are unsure about cryptocurrency taxes, it is best to consult a certified accountant.

Tax evasion

The IRS has clarified that cryptocurrencies are taxed as assets similar to property. This means that US taxpayers must report Bitcoin transactions for tax purposes. Retail transactions, such as purchasing or selling goods with Bitcoin, incur capital gains tax. Additionally, any income received in cryptocurrency, through mining, staking, lending, or as payment for goods or services, is also taxable.

There are two types of crypto tax evasion: evasion of assessment and evasion of payment. Evasion of assessment is the more common type, where a taxpayer willfully omits or underreports income or overstates deductions. Evasion of payment occurs when a taxpayer conceals assets or funds that could be used to pay off their tax liability.

The punishments for crypto tax evasion can be severe. As both tax evasion and tax fraud are federal offences, those found guilty may face up to 75% of the tax due, with a maximum of $100,000 in fines ($500,000 for corporations) or up to 5 years in prison.

The IRS has a range of tools and methods to detect crypto tax evasion, including:

• Analysing data from crypto exchanges: Many crypto exchanges share Know Your Client (KYC) data with the IRS, and the IRS has also used John Doe summons to compel crypto exchanges to share user data.
• Analysing IRS 1099 forms: Crypto exchanges like Coinbase, Crypto.com, and Kraken issue 1099 forms to certain US users, and the IRS receives these forms as well.
• Data-matching blockchain transactions with "anonymous" wallets: The IRS has access to all transactions made on a given blockchain and can work to match wallet addresses to individuals.
• Analysing currency transaction reports: Businesses that receive more than $10,000 in cash from a customer must file a currency transaction report, which can help the government identify potential tax evasion. However, the same rules do not currently apply to crypto transactions.

Frequently asked questions