Bitcoin and Taxes
If you sell or exchange Bitcoin for cash or other cryptocurrencies or tokens like ETH, Uniswap, or BNB you have to report and pay federal taxes on realized capital gains.
Tax Treatment of Bitcoin
Bitcoin, just like Ethereum and other cryptocurrencies, is treated as property for tax purposes. Even though the name may indicate that cryptocurrency falls into the category of currency this is not the case. In the United States, any gain or loss generated by Bitcoin is not treated like other forms of foreign currency when it comes to taxation.
Like other virtual currencies, Bitcoin officially holds the status of property. This is why in the U.S. general tax principles that are applicable to property transactions also apply to the sale and/or exchange of Bitcoin. For the taxpayer, this means that Bitcoin is a capital asset and, therefore, is subject to capital gains tax.
In our elaborate Bitcoin Tax Guide below, we will give you an overview of the proper taxation of Bitcoin in the U.S. and also show you examples to help you understand the issue.
Exchange or Sale of Bitcoin
Just like with any other cryptocurrency, the sale and exchange of Bitcoin is a taxable event, and, in the US, capital gains tax applies to this. To determine whether a capital gain or loss was realized in the event of a sale, the difference between the fair market value of Bitcoin at the sale and the adjusted basis is calculated.
Example: 1 Bitcoin bought on Coinbase on April 28. 2020 for $7,746 plus 0.5% Coinbase fees and transferred to a Ledger hardware wallet. Later on, 1 BTC was transferred to Kraken on October 15. 2020 and sold for $11.393. For simplification purposes, we assume no other fees incurred.
Adjusted Basis = $7,746 + 0.5%*$7,746 = $7,784.73
Fair market value = $11.393
Realized Capital Gain = $3,608.27
If Bitcoin is exchanged or traded for another cryptocurrency the calculation of a capital gain or loss is based on the difference between the fair market value of the cryptocurrency at the time of the exchange and the adjusted basis of Bitcoin.
Example: 1 Bitcoin bought on Coinbase on April 28. 2020 for $7,746 plus 0.5% Coinbase fees and transferred to a Ledger hardware wallet. Later on, 1 BTC was transferred to Kraken on October 15. 2020 and exchanged for ETH 30.2. For simplification purposes, we assume no other fees incurred.
Adjusted Basis = $7,746 + 0.5%*$7,746 = $7,784.73
Fair market value = ETH 30.2 * $377.75 = $11.408.05
Realized Capital Gain = $3,623.32
Ultimately, this means that a net gain or net loss is realized by the sale or exchange of Bitcoin. Depending on how long Bitcoin was held, this is taxed as a short-term capital gain at regular income tax rates or as a long-term capital gain at reduced rates. To learn more about taxes on cryptocurrencies, read our cryptocurrency taxes guide
Cost Basis and Adjusted Basis of Bitcoin
As with any other asset, the terms of cost basis and adjusted basis are important for proper tax treatment. The cost basis is the amount of money paid for Bitcoin by the taxpayer. Any additional costs, e.g. transaction fees and commissions, can be considered the adjusted price of the Bitcoin. Both the cost basis and the adjusted basis make up the acquisition cost. In the case of buying Bitcoin, the acquisition cost consists of the price of the Bitcoin at the time of purchase and possible fees, e.g. when buying Bitcoin on an exchange.
Capital Gains on Bitcoin
In order to calculate the gain on the sale, the selling price less acquisition costs and income-related expenses must be taken into account.
Since most cryptocurrencies are bought at different times, it is important to select an evaluation procedure, which is accepted also by the tax office.
The First-In-First-Out (FIFO) calculation method assumes that the coins purchased first are sold first. Alternatively, specific identification for calculating cost basis might be applied.
In the case of exchanging Bitcoin, the capital gain or loss is calculated by the difference between the fair market value of bitcoin on the day of exchange and the adjusted base bitcoin.
In the United States, the IRS requires taxpayers to use the First-In-First-Out (FIFO) method or specific identification for calculating cost basis. Taxpayers must apply a consistent methodology to identify the cost basis for their cryptocurrency and are encouraged to keep detailed records of all exchanges. This means that you should always keep track of your Bitcoin transactions. The cost basis or adjusted basis will be reported on Form 8949 and Form 1040, Schedule D.
Realized and Unrealized Bitcoin GainsThe realized amount in the sale or Exchange of Bitcoin is determined by the fair market value of the cryptocurrency received by the individual at that time. The fair market value can be determined by converting the amount of Bitcoin into USD at the current exchange rate. Again, it is always important to keep track of these exchange rates for tax purposes. Just holding Bitcoin or transferring to another exchange or wallet will not be taxable as there is no gain or loss realized.
If Bitcoin is sold for cash, the amount realized by the taxpayer is equal to the sale price and any other consideration given to the taxpayer in exchange for the Bitcoin.
Similarly, in the event of the exchange of Bitcoin for another cryptocurrency, the amount realized by the taxpayer is equal to the fair market value of the incoming cryptocurrency on the date of the exchange and any other consideration given to the taxpayer in the exchange.
To illustrate, if 1 BTC (basis $5,000) was exchanged for 10,000 units of ADA and 1 ADA = $0.60, the taxpayer will need to recognized gain in the amount of $1,000 [(10,000 x $0.60) – $5,000]. The character of this gain is dependent on the holding period of the original currency in the hands of the taxpayer.
The taxpayer’s total net capital gain or loss (i.e. net short-term and long-term capital gains and losses) will be reported on the taxpayer’s Form 1040. Please refer below to the applicable capital gain tax rates to be applied and detailed reporting.
Any subsequent sales or exchanges of the cryptocurrency in the hands of the taxpayer will follow capital gain or loss recognition as explained above. The basis of the newly exchanged cryptocurrency is equal to the basis of the amount of Bitcoin it was exchanged for. The holding period of the new currency in the hands of the taxpayer will begin on the day of the exchange.
If Bitcoin was exchanged for another cryptocurrency before January 1st, 2018, this exchange might be treated as a nontaxable like-kind exchange. Although it is still not clear, if like-kind exchange can be applied for Bitcoin and other cryptocurrencies and there is no clear guidance from the IRS, the saving potential is huge, so you might want to check with a qualified tax professional, if you should pursue like-kind exchange.
An important aspect is whether the transaction happened before or after the January 1st, 2018, because of the new tax law that limited like-kind exchange to only real estate. After January 1st, 2018, all exchanges of Bitcoin, just like any other exchange of non-real property, is a taxable event.
For both parties involved, the application of the like-kind exchange would mean no gain or loss was realized. Even though this special type of exchange is tax-free make sure to keep records on when your Bitcoin was exchanged so that you can use it as proof.
Bitcoin Holding Period
The holding period of Bitcoin is an important factor for its proper tax treatment. To determine this amount of time, the date of the sale or exchange of the cryptocurrency and the date of its acquisition is taken into consideration. If the taxpayer held the Bitcoin for exactly or less than a year (365 days) any realized gain or loss is considered to be short-term. Likewise, if it was held for longer than a year it is deemed long-term capital gain or loss. The beginning and end dates of the holding period are to be reported on Form 8949.
Short-Term Gain/Loss Treatment of Bitcoin
Any amount of Bitcoin that was held for less than a year or exactly one year (365 days) until it was sold or exchanged is considered a short-term gain or loss and is, therefore, taxed at ordinary income tax rates. These are dependent on the taxpayer’s income and the rates are progressive. The taxpayer’s total net capital gain or loss (i.e. net short-term and long-term capital gains and losses) is to be reported on the taxpayer’s Form 1040. Specific details regarding the taxpayer’s short-term gain or loss will be reported on Schedule D and Form 8949 (Part I).
Please see the table below for the 2019 tax rates for Individual Filers:
|Taxable Income||Tax Rate|
|$0 to $9,700||10%|
|$9,701 to $39,475||12%|
|$39,476 to $84,200||22%|
|$84,201 to $160,725||24%|
|$160,726 to $204,100||32%|
|$204,101 to $510,300||35%|
|$510,301 or more||37%|
Long-Term Gain/Loss Treatment of Bitcoin
Just like for the short-term gain or loss, the long-term treatment for Bitcoin highly depends on the taxpayer’s income tax bracket. However, due to the fact that Bitcoin was held for longer than a year, these rates come in a reduced percentage. To determine the correct reduced tax rates and calculate long-term capital gains tax appropriately, the taxpayer is highly advised to use the instructions on Form 1040.
Ultimately, the taxpayer’s total net capital gain or loss of Bitcoin (i.e. net short-term and long-term capital gains and losses) will be reported on the taxpayer’s Form 1040. Specific details regarding the taxpayer’s long-term gain or loss will be reported on Schedule D and Form 8949.
Please see the table below for the 2019 preferential long-term capital gain tax rates for individual filers:
|Taxable Income||Long-Term Capital Gain Tax Rate|
|Over $434,550||20 %|
Taxes on Bitcoin Forks
Most cryptocurrencies like Bitcoin are open source projects. This characteristic makes it possible to copy the code of the respective Coins, thus to “fork”, in order to extend and improve the cryptocurrency by functions.
Forks are classified into Soft and Hard Forks. Soft Forks are backward compatible, i.e. it is not absolutely necessary that all nodes perform an update, because the new and old software can coexist. Hard Forks, on the other hand, are only forward compatible.
To find out if and how much tax you have to pay for Bitcoin forks, check out Taxes on Hard Forks.
Taxes on Bitcoin Airdrops
Some blockchain projects build their community by giving away their coins to token holders of existing coins. There are also Airdrops in the context of marketing campaigns. Is it free money or do you have to tax it?
Taxes on Bitcoin Mining income
In cryptocurrencies such as Bitcoin, mining describes the process used to process, secure and synchronize transactions. Miners provide the system with computing power for this purpose. Since this computing power is very costly due to the high power consumption, the miners are paid by the so-called mining reward (currently 12.5 units + transaction fees ). If and when a miner has to pay taxes, we clarify in the article Taxes on Mining income.A taxpayer in excess of $400 generated from the mining of cryptocurrency must be reported to the IRS.
Taxes on Margin Trading
Generally, any monetary derivative (futures, swaps, and forward ) which don’t trade on exchanges or boards of trade that aren’t found in the US don’t fulfill Section 1256 contracts. The financial outcome of those transactions is subject to the capital gains regime stated at the Capital Gains Section.
Find out more about Margin Trading with Bitcoin and other cryptocurrencies
Bitcoin Tax FAQ
Is Bitcoin taxable?
For US federal tax purposes, Bitcoin and other cryptocurrencies are treated as property. As such, general tax principles applicable to property transactions apply to transactions involving the sale or exchange of cryptocurrency. Property held by a taxpayer is generally considered a capital asset and will be subject to capital gains tax.
When do you have to pay taxes on Bitcoin?
The sale or exchange of cryptocurrency is a taxable event subject to capital gains tax. For example, if you exchange Bitcoin for Ether, you will need to tax the capital gain or loss resulting from this transaction.
How is Bitcoin taxed?
The sale or exchange of cryptocurrency will result in a net gain or loss and will be taxed as a short-term capital asset at ordinary income tax rates or as long-term capital assets at reduced rates, depending on the amount of time the capital asset is in the hands of the taxpayer (i.e. holding period). That means if you hold crypto for more than a year (without selling or exchanging it), you will pay long-term capital gains when you sell or exchange.
How to pay taxes on Bitcoin?
You will need to calculate short-term and long-term capital gains and provide the details in Form 1040 and Form 8949. With the Cryptotax application, the capital gains will be automatically calculated and you will receive the filled forms.
Do you pay taxes on Bitcoin mining?
In general, all income or rewards received by a taxpayer in excess of $400 generated from the mining of cryptocurrency must be reported to the IRS. The taxpayer must also identify whether they are a hobby or (self-employed) business miner for tax reporting purposes.
If the taxpayer is a hobby miner, the income received by the taxpayer as it relates to cryptocurrency mining will be treated as ordinary income.
If the taxpayer is deemed to be engaged in a trade or business for which virtual currency mining generates trade or business income and owns/leases their own mining (business) equipment, the taxpayer must report any income or rewards received as self-employment income. Expenses related to the mining business activity including but not limited to the depreciation of mining equipment, electricity, and hardware may be deducted for tax purposes. Business miners are also subject to self-employment tax at a rate of 15.3% for the 2017 and 2018 tax year.
When does the IRS consider crypto mining as a business?
In general, the IRS states a hobby activity is done mainly for recreation or pleasure. The IRS uses the following criteria to determine whether a taxpayer’s profitable activity is deemed a hobby or a trade or business. Please note one factor alone is decisive and all factors must be considered:
- Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
- Whether the time and effort you put into the activity indicate you intend to make it profitable.
- Whether you depend on income from the activity for your livelihood.
- Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
- Whether you change your methods of operation in an attempt to improve profitability.
- Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
- Whether you were successful in making a profit in similar activities in the past.
- Whether the activity makes a profit in some years and how much profit it makes.
- Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
How do I report Bitcoin mining income?
Hobby miners need to report their income from mining on Form 1040.
To report business income from mining, the taxpayer will report the amount received as self-employment income and any related mining business expenses on Schedule C and Form 1040. Additionally, the self-employment tax beared by the taxpayer will be calculated and reported on Schedule SE and Form 1040.
Which is the best crypto tax software?
Cryptotax aims to provide the best solution for reporting taxes on cryptos. We work together with a Big 4 accounting firm to ensure full legal compliance of our tax reports. Cryptotax supports all types of transactions that you need as crypto investor, trader or hodler: Airdrops, ICOs, Hard Forks, OTC Trades, Lending, Staking, Masternodes, Bounties, Swaps, Gifts and Margin Trading.
The best thing is that you get all of this for free with the early access!
Do I have to work with a crypto tax spreadsheet?
You do not need to deal with spreadsheets anymore and with Cryptotax you have an application that will save you a lot of time. It will apply certified tax logic to all your transactions, calculate taxable income and fill all the forms automatically for you.
Where can I find a Bitcoin tax calculator?
You can use Cryptotax application, which is much more than just a tax calculator. It makes sure that all your transactions are considered properly according to the US federal tax law and fills out the IRS forms for you. The best thing is that you can use Cryptotax for free within the early access!