Bitcoin was the first cryptocurrency and remains the most widely held, but there are thousands of others in circulation and the same federal tax rules apply to all of them. The IRS treats cryptocurrency as property rather than as currency. Under that treatment, most transactions produce a capital gain or loss, and certain receipts are treated as ordinary income instead. This article covers when cryptocurrency is taxed, which forms are used to report it, and what changed for the 2025 tax year.<\/p>\n\n\n\n
Bitcoin is a cryptocurrency or as described by the IRS “virtual” currency. Bitcoin can be used to pay for goods and services, it can also be held as an investment, and as such it is considered a taxable asset. This means its tax treatment is different than that of legal tender (dollars). It is subject to tax in the same way the receipt of property is subject to federal tax.<\/p>\n\n\n\n
According to the IRS, “Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin is one example of a convertible virtual currency\u2026”<\/p>\n\n\n\n
If a taxpayer receives Bitcoin as payment for goods and services, they must compute the fair market value of the virtual currency and add it into their income. Per the IRS, “General tax principles applicable to property transactions apply to transactions using virtual currency.”<\/p>\n\n\n\n
Here are two examples where the use of Bitcoin as a payment must be reported to the IRS:<\/p>\n\n\n\n
If someone hires an independent contractor and pays them in Bitcoin instead of dollars, the contractor must report that as income. The independent contractor will also be subject to self-employment taxes on this transaction.<\/p>\n\n\n\n
If an employer decides to pay wages to employees (oversees or domestic) with Bitcoin, those wages must be reported on a Form W-2 and will have federal income tax withheld as well as payroll taxes.<\/p>\n\n\n\n
Purchasing cryptocurrency is not itself a taxable event. A taxpayer may buy and hold cryptocurrency indefinitely without owing any tax on it, even if the value increases substantially during that period. Tax is owed at the point of disposal, which includes selling the cryptocurrency for dollars, exchanging it for a different cryptocurrency, or using it to pay for goods and services.<\/p>\n\n\n\n
In each of these situations, the gain or loss is the difference between the amount received and the cost basis, which is the original purchase price plus any fees paid to acquire it. If a taxpayer purchases $2,000 of Bitcoin and later sells it for $3,200, the reportable gain is $1,200. An exchange of one cryptocurrency for another is a taxable transaction as well, even though no dollars are involved, because all transactions are measured in U.S. dollars for federal tax purposes.<\/p>\n\n\n\n
The applicable rate depends on how long the cryptocurrency was held before disposal. Cryptocurrency held for one year or less produces a short-term capital gain, which is taxed at ordinary income rates ranging from 10% to 37%. Cryptocurrency held for more than one year produces a long-term capital gain. Long-term rates are 0%, 15%, and 20%, and the applicable rate is determined by the taxpayer’s taxable income for the year.<\/p>\n\n\n\n
Capital losses offset capital gains. If losses exceed gains for the year, up to $3,000 may be deducted against ordinary income, and any remaining loss is carried forward to future years. Cryptocurrency is not currently subject to the wash sale rules that apply to securities, which disallow a loss deduction when a substantially identical asset is repurchased within 30 days (legislation extending those rules to digital assets has been proposed but not enacted). Losses from cryptocurrency that is lost or stolen generally cannot be deducted.<\/p>\n\n\n\n
Cryptocurrency received as payment for work is ordinary income, measured at its fair market value on the date of receipt. This applies to wages and contractor payments, as described above, and to several other types of receipts.<\/p>\n\n\n\n
Cryptocurrency received from mining is ordinary income at fair market value on the date it is received, and it may be subject to self-employment tax in addition to income tax. Staking rewards are treated the same way. Tokens received through an airdrop following a hard fork are also ordinary income. A hard fork that does not result in the taxpayer receiving new cryptocurrency generally does not create income.<\/p>\n\n\n\n
The amount reported as income establishes the taxpayer’s basis in that cryptocurrency. If it is sold later, capital gains tax applies only to the appreciation after receipt, so the amount already reported as income is not taxed a second time.<\/p>\n\n\n\n
Form 1040 includes a question asking whether the taxpayer received, sold, exchanged, or otherwise disposed of a digital asset during the tax year. A “yes” response tells the IRS that related activity should appear elsewhere on the return.<\/p>\n\n\n\n
Capital transactions are reported on Form 8949, and the totals are transferred to Schedule D. Ordinary income from mining or contractor work is generally reported on Schedule C, with self-employment tax calculated on Schedule SE.<\/p>\n\n\n\n
Beginning with the 2025 tax year, brokers and exchanges must issue Form 1099-DA for certain sales and exchanges of digital assets, with a copy provided to the IRS. Not every platform will issue this form and not every transaction is covered by the requirement, but the taxpayer remains responsible for reporting all activity regardless of whether a form is received.<\/p>\n\n\n\n
If the individual receiving the Bitcoin plans to hold it for some period of time, it is worth noting that gains from the sale or exchange of Bitcoin may also be taxable since Bitcoin that is held can also be considered a capital asset. A simple explanation of capital assets is \u2013 investments that are expected to generate value over a period of time. Here are some helpful facts to help you understand the Schedule D you must file with your 1040 if you are reporting the sale or exchange of capital assets: https:\/\/www.e-file.com\/help\/schedule-d.php<\/a> <\/p>\n\n\n\n For more help with Bitcoin and potential taxes, IRS.gov has expanded information on virtual currency. Here you can find Notice 2014-21 that the IRS has published with information including many frequently asked questions as well as the IRS answers. The agency also maintains a detailed FAQ addressing basis, holding periods, gifts, donations, and recordkeeping, though those answers generally apply to transactions completed before January 1, 2025. More on this can be found at the IRS website – here<\/a>.<\/p>\n\n\n\n Accurate records are necessary for cryptocurrency reporting. Each transaction requires a date, a fair market value in dollars, and a cost basis, and this information is difficult to reconstruct after the fact. Retain transaction histories from every exchange and wallet used during the year.<\/p>\n\n\n\n Cryptocurrency reporting requires more detail than a standard return, but filing doesn’t have to be complicated. E-file.com supports capital gains and self-employment income, and our software performs the calculations for you.<\/p>\n\n\n\n Note: Tax laws may change with little notice. We do our best to keep this information current, but it is provided on an \u201cAS IS\u201d basis. It should not be considered, legal, financial, or other professional guidance. For more, see our terms.<\/p>\n","protected":false},"excerpt":{"rendered":" Cryptocurrency is treated as property by the IRS, which means selling, exchanging, or using it can trigger capital gains or losses. This guide explains how Bitcoin and other digital assets are taxed, what forms to use, and what changed for the 2025 tax year.<\/p>\n