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Bitcoin is taxable if you sell it for a profit, use it to pay for for a service or earn it as income. You report your transactions in U.S. dollars, which generally means converting the value of your Bitcoin to dollars when you buy, sell, mine, earn or use it.
Here’s how Bitcoin taxes work.
1. When your Bitcoin is taxed depends on how you got it
If you sell Bitcoin for a profit, you're taxed on the difference between your purchase price and the proceeds of the sale. Note that this doesn't only mean selling Bitcoin for cash; it also includes exchanging your Bitcoin directly for another cryptocurrency, and using Bitcoin to pay for goods or services.
But exactly how Bitcoin taxes are calculated depends on your specific circ*mstances. Here's how it boils down:
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. You may have a capital gain that’s taxable at either short-term or long-term rates.
Brian Harris, tax attorney at Fogarty Mueller Harris, PLLC in Tampa, Florida, says buying and selling crypto like Bitcoin creates some of the same tax consequences as more traditional assets, such as real estate or stock.
"The value ... goes up and down, and then if you sell or exchange that property, then you have capital gain or loss, depending on how that value has moved," Harris says.
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2. Two factors determine your Bitcoin tax rate
If you’re paying taxes on the profit you made buying and selling Bitcoin, your rate depends on:
How long you owned it before selling. If you owned Bitcoin for one year or less before selling it, you’ll face higher rates — between 10% and 37%. If you owned Bitcoin for more than a year, your rates will be between 0% and 20%.
Your total income for the year. The highest tax rates apply to those with the largest incomes.
» Find out more about tax rates and crypto
3. The IRS has the paperwork you’ll need
The onus remains largely on individuals to keep track of their gains and losses. As a reminder, the IRS has added a question to tax return forms asking filers about their crypto activity.
This year, the question reads: “At any time during 2023, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?"
The IRS notes that when answering this question, you can check "no" if your only transactions involved buying digital currency with real currency, and you had no other digital currency transactions for the year.
For example, if all you did in 2023 was buy Bitcoin with U.S. dollars, and you didn't sell, send or purchase any goods or services with that Bitcoin, you don't have to check "yes" to that question.
But to make sure you stay on the right side of the rules, keep careful records.
You'll need records of the fair market value of your Bitcoin when you mined it or bought it, as well as records of its fair market value when you used it or sold it.
A Form 1099-K might be issued if you’re transacting more than $20,000 in payments and 200 transactions a year. But both conditions have to be met, and many people may not be using Bitcoin 200 times in a year. Whether you cross these thresholds or not, however, you still owe tax on any gains.
🤓Nerdy Tip
While popular tax software can import stock trades from brokerages, this feature is not as common with crypto platforms. You may need special crypto tax software to bridge that gap. If you only have a few dozen trades, you can record your trades by hand.
» Calculate your crypto profit or loss
4. You can write off Bitcoin losses
Bitcoin roared back to life in late 2023, and then hit an all-time high on March 5, 2024, topping $69,000.
But, if you lose money on any investment, you have options. If that's you, consider declaring those losses on your tax return and see if you can reduce your tax liability — a process called tax-loss harvesting. The process for deducting capital losses on Bitcoin or other digital assets is very similar to the one used on losses from stock or bond sales. The maximum amount you can write off in one year is $3,000.
However, there is one major difference between Bitcoin losses and stock losses: Cryptocurrencies, including Bitcoin, are exempt from the wash-sale rule. This prevents traders from selling a stock for a loss, claiming the tax break, then immediately buying back the same stock.
With Bitcoin, traders can sell for a loss in order to claim the tax break, but immediately buy it back. However, with the reintroduction of the Lummis-Gillibrand Responsible Financial Innovation Act in 2023, it's possible this crypto wash sale loophole could potentially close in the near future.
» Read more: Here's a primer on tax evasion vs. tax avoidance
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5. Failure to report Bitcoin can be costly
Privacy is a prominent feature of many cryptocurrencies, but that doesn’t mean crypto traders are wrapped in a shield of invisibility. The IRS uses multiple methods to keep tabs on the industry. For example, it’s gained information about tens of thousands of users of popular crypto exchanges by issuing subpoenas to the companies that run them.
While not paying taxes on your gains might be an honest mistake, don’t expect the IRS to take pity.
Harris says the IRS may not have the resources to come after every person who fails to disclose cryptocurrency transactions. But "that doesn’t mean that people should not report those transactions because they don’t think the IRS is going to find out about it," he says.
If you “carelessly, recklessly or intentionally” ignore tax rules or regulations, which include reporting gains and losses on Bitcoin trades, you’ll face fines in addition to taxes. If you don’t pay your penalty on time, you’ll be charged interest. Getting caught underreporting investment earnings has other potential downsides, such as increasing the chances you face a full-on audit.
If you’re doing your taxes and realize you don’t have the money to pay what you owe, you can apply for a repayment plan with the IRS. You’ll pay interest, but you’ll avoid the penalties that come with underreporting income, filing taxes late or not filing your taxes at all.
Frequently asked questions
How can you minimize taxes on Bitcoin?
One option is to hold Bitcoin for more than a year before selling. Because short-term capital gains taxes are higher, you’ll pay higher taxes if you sell and realize a gain within a year.
What if you lose money on a Bitcoin sale?
If you sell Bitcoin for less than you bought it for, the amount of the loss can offset the profit from other sales.
Does trading one crypto for another trigger a taxable event?
Yes. You still owe taxes on the crypto you traded. The fair market value at the time of your trade determines its taxable value.
How much do you have to earn in Bitcoin before you owe taxes?
You owe taxes on any amount of profit or income, even $1. Crypto exchanges are required to report income of more than $600, but you still are required to pay taxes on smaller amounts.
Do you need to report taxes on Bitcoin you don’t sell?
If you buy Bitcoin, there’s nothing to report until you sell.
If you earned crypto through staking, a hard fork, an airdrop or via any method other than buying it, you’ll likely need to report it, even if you haven’t sold it.
Author Andy Rosen owned Bitcoin at the time of publication.
