Understanding the Basics of Bitcoin Taxes [US 2024]

15 Jan, 2024 · 25 min read

Bitcoin (BTC) is taxed under the current US tax code, with investors having to track their gains and income from the leading digital asset.

In short, trading any Bitcoin will be taxed at a capital gains level, while any income from Bitcoin-earning activities will be taxed at an income level, but there’s more!

Discover everything about Bitcoin taxes, from determining gains to generating reports!

Key Takeaways About Bitcoin Taxes in the US
  • Buying Bitcoin is not a taxable event in the US as long as you don’t sell any;

  • Trading Bitcoin for another cryptocurrency, FIAT (e.g., USD), or an NFT is taxable in the US, leading to capital gains taxes;

  • Earning an airdrop, hard fork, or interest in the form of Bitcoin is taxable under income taxes;

  • You need to report your gains/losses from Bitcoin trading and any income from Bitcoin-earning activities;

  • You can track all of your Bitcoin gains and income with crypto tax software like CoinTracking.

Bitcoin & Taxation: An Overview

Bitcoin is considered property by the IRS, leading to it being taxable across several transaction types.

Trading Bitcoin is the most common taxable event in the US, with taxation on a capital gains basis. However, if you earn any income in the form of Bitcoin or any other crypto, you’d be taxed at an income level.

You need to determine any gain/loss that you have from Bitcoin trading and any income from earning activities like crypto interest products, crypto airdrops, hard forks, crypto salaries, and more.

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Taxation of Bitcoin Transactions: Buying, Selling, and Trading

Taxation of Buying Bitcoin

Buying Bitcoin is not a taxable event in the US since you’re only buying an asset and not converting any of your holdings into other assets.

Buying any asset and holding it (without selling any of it) is usually not a taxable event in the US.

The amount you spend when buying Bitcoin is your future cost basis when you sell that Bitcoin, thus the importance of tracking all of your transactions.

Taxation of Selling Bitcoin

Selling Bitcoin for any other cryptocurrency, FIAT (e.g., USD), or an NFT is a taxable event in the US. Any conversion of Bitcoin to another crypto asset or FIAT currency is always taxable, subject to capital gains taxes.

In that case, investors need to determine the gain/loss on each Bitcoin transaction and then report it on the right crypto tax forms.

Taxation of Trading Bitcoin

Trading Bitcoin for cryptocurrencies, FIAT (e.g., USD), or other tokens (e.g., NFTs, DeFi tokens) is a taxable event, subject to capital gains taxes, with the tax rate depending on the holding period.

If you held your Bitcoin for over 12 months, you’d be taxed at a long-term tax rate, ranging from 0% to 20%. If you held your Bitcoin for less than 12 months, you’d be taxed at a short-term tax rate, ranging from 10% to 37%.

Taxation Hard Forks, airdrops, and interest in Bitcoin

Receiving any Bitcoin from transactions like hard forks, airdrops, or crypto interest products is a taxable event in the US.

Those earning transactions are taxed under an income level in the US based on the Fair Market Value (in USD) of the Bitcoin received in each scenario (at the time that the investor received such assets).

Transaction | Type of tax

  • Selling Bitcoin for Ethereum: Capital gains

  • Selling Bitcoin for any crypto asset: Capital gains

  • Selling Bitcoin for FIAT (e.g., USD, EUR): Capital gains

  • Selling Bitcoin for an NFT: Capital gains

  • Earning Bitcoin in an airdrop: Income

  • Earning Bitcoin in an hard fork: Income

  • Earning Bitcoin in a crypto interest product: Income

  • Earning your salary in Bitcoin: Income

Tax Reporting Requirements for Bitcoin Investors

In the US, there are several reporting procedures when trading crypto. Bitcoin tax reporting is divided into 2 steps:

  1. Declaring that you have acquired crypto if you make additional trades: you need to answer “Yes” to the question regarding cryptocurrency on page 1 of 2024 Form 1040.
  2. Reporting your transactions and gains/losses: You need to report all your trades on Form 8949 and Schedule D of your Form 1040. If you have crypto income (e.g., from hard forks, airdrops, staking, mining), you also need to report that income on your tax return.

What Happens If You Don’t Report Taxes on Bitcoin to the IRS?

If you don’t report Bitcoin to the IRS, you could face penalties and fines, while harsher consequences are possible if this lasts for years, for example.

Does the IRS Know I Own Bitcoin?

The IRS has resources to discover the holdings of crypto investors, while new laws are making it easier for tax authorities to share this information across countries.

Moreover, the IRS also has legal methods to have access to more customers’ information by summoning crypto brokers like exchanges.

Bitcoin Taxes: Income or Capital Gains?

Your Bitcoin taxes will depend on the nature of the transactions, with the possibility of investors being taxed at an income or capital gains level.

If you trade Bitcoin for any other crypto asset or FIAT, you’d be taxed at a capital gains level, with a tax rate ranging from 0% to 37% depending on the holding period of your Bitcoin (long-term versus short-term).

If you earn Bitcoin from hard forks, airdrops, salaries, mining rewards, crypto interest products, etc, you’d be taxed at an income level, with the tax rate based on your total income for the year.

Tax Implications of Mining Bitcoin in the US

Bitcoin mining leads to income tax in the US. If you earn income from any crypto mining activities, you have to report it as taxable income.

But, there’s good news: you can get tax deductions if you are doing mining as a business. Some of these deductions include the necessary equipment to set up a profitable mining operation.

On top of the initial high investment, the recurring electricity costs take a toll on your predicted profit. Fortunately, you can also deduct all those monthly costs from your taxable mining income.

Let’s look at an example:

John spent $30K to set up his mining operation at the beginning of 2021. On top of that, he has $800/month mining-related expenses and brings in $1500/month as mining revenue.

At the end of 2021, John generated $18,000 in revenue and he incurred $9,600 of annual expenses. John can deduct those costs and end the year with a taxable income of $8,400 ($18,000 – $9,600).

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Tax Deductions and Exemptions for Bitcoin Transactions

How Can I Avoid Paying Taxes on Bitcoin?

If you meet certain requirements, you may be able to avoid paying bitcoin taxes. For example, if your total income is less than the filing threshold, you don’t need to pay any taxes. If all capital gains from your crypto trades are long-term and you qualify for a 0% long-term capital gains tax rate, you don’t have to pay crypto taxes.

There are also some ways you can use to reduce your crypto taxes. For example, trading fees and similar trading expenses can be deductible from your sales proceeds, which will lower your capital gains.

If you have altcoins that have depreciated a lot in value and you have high unrealized gains with Bitcoin, you can also realize those altcoins losses to lower your tax bill on the Bitcoin profits.

If you run a mining operation as a business, all the expenses related to your activity (e.g., electricity expenses, equipment) can be deductible.

Finally, If you donate crypto to a qualified charity (a charitable organization), you may also be able to use that amount to reduce your tax bill.

Taxation of Bitcoin Gifts and Donations

Usually, giving Bitcoin is not taxable for the person offering it, while donating Bitcoin to a qualified charitable organization can lead you to get a deduction from your gains.

Let’s look at Bitcoin gifts in more detail.

In 2023, if you have gifted less than $17K to someone (individual recipient), you won’t need to file a gift tax return. In 2024, the threshold will increase for $18K (including cryptocurrencies).

However, if the person who received the Bitcoin later sells it, he/she will be subject to capital gains tax on the profit. In that case, the cost basis can be:

1) The same as your cost basis; or

2) Equal to the fair market value of the coin at the time of the gifting.

Determination of basis cost depends on whether the fair market value is higher or lower than your basis. We encourage you to check IRS Publication 551, Basis of Assets, for more details.

As for Bitcoin donations, if you do it to a qualified charitable organization, you can claim an itemized tax deduction and offset your gains with that deduction, lowering your crypto taxes.

How to calculate Bitcoin taxes?

Let’s look at how you calculate Bitcoin taxes if you trade Bitcoin for another cryptocurrency. Each crypto-to-crypto trade is treated as a 2-step transaction:

  1. The sale of the first crypto (e.g., BTC) at its fair market value in FIAT at the time of your exchange. A gain/loss will be recognized for the difference between the fair market value/sales proceeds and your basis in the coin.
  2. Purchase of the second crypto (e.g., ETH) for the amount of deemed sales proceeds from the sale of the first crypto.

Even though there is no fiat involved, you still need to recognize a gain or loss for the deemed sale of the first crypto.

Example: John sell 0.1 BTC for 4 ETH

When John bought his Bitcoin, the price was $30K. At the time of this sale, 1 BTC is $40K.

John’s profit from selling 0.1 BTC is $1K ($4,000-$3,000).

He needs to recognize this gain ($1,000) and pay capital gains tax at the long-term or short-term rate depending on the amount of time he held the coin (more/less than 12 months).

Then, he purchases 4 ETH (each ETH worth $1,000) with the $4,000 (sales proceeds) from selling 0.1 BTC at $40K. The purchase is not a taxable event, but it will be when he sells ETH for FIAT or another crypto.

If you trade Bitcoin for FIAT, the calculation is more simple. If John sold his 1 BTC for USD when it was $40K, he just needs to subtract the cost basis ($30K), having a gain of $10K.

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Bitcoin Taxes in other countries

Bitcoin Taxes Canada

If you trade Bitcoin in Canada, you’d be taxed at a federal income tax level, while individual investors only have to pay taxes over 50% of their profits. Discover how Canada taxes crypto.

Bitcoin Taxes Australia

Australia taxes Bitcoin profits at the net capital gains level if you hold Bitcoin as an investment asset. Discover more in our Australia crypto tax guide.

Bitcoin Taxes UK

The UK taxes Bitcoin profits at a capital gains level if you trade it, while if you earn income from Bitcoin, you’d be taxed at the income tax level. Read more in our UK crypto tax guide.

Frequently Asked Questions
about Bitcoin taxes in the US

Do I have to report Bitcoin on my tax return?2023-12-27T15:57:10+01:00

You have to report any gain/loss you have from trading Bitcoin and any income you earn from transactions like hard forks, airdrops, salaries, etc.

How do I avoid tax on Bitcoin sales?2023-12-27T15:56:36+01:00

You can avoid taxes on Bitcoin sales by deducting losses, donating Bitcoin, investing in tax-optimized accounts like IRAs, holding in the long-term, and more (e.g., moving to a crypto tax-free country).

How much tax do I pay on Bitcoin?2023-12-27T15:54:13+01:00

If you trade Bitcoin and have profits, you’d pay a capital gains tax rate depending on the holding period of that Bitcoin, ranging from 0% to 37%.

Do you pay tax on Bitcoin?2023-12-27T15:53:34+01:00

Yes, if you trade Bitcoin for any other cryptocurrency, FIAT (e.g., USD), or NFT, you’d pay taxes in the US.

Conclusion

Bitcoin is taxed in the US under capital gains and income taxes, depending on the type of transaction. In the US and other countries, you need to track the gain/loss on each trade involving Bitcoin and any other crypto while tracking the income from Bitcoin-earning activities.

The easiest way to track gains/losses and income is with the help of crypto tax software that automatically determines all this information and enables you to generate the necessary tax reports to file your crypto taxes.

Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.

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Moritz Nold: Crypto Tax Manager
Autor
Moritz
Crypto Tax Manager
Tax Expert, Webinar-Host, Content Creator, Crypto Enthusiast and Investor. Interested in everything regarding the crypto space.
Tax Expert, Webinar-Host, Content Creator, Crypto Enthusiast and Investor. Interested in everything regarding the crypto space.

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