Crypto as Property: US Tax Treatment for Bitcoin

Crypto as Property: US Tax Treatment for Bitcoin
Date: 6 Nov 2025 Cryptocurrency & Blockchain

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Every time you buy a coffee with Bitcoin, sell Ethereum for dollars, or receive crypto as payment, you’re triggering a taxable event in the United States. It doesn’t matter if you’re a casual user or a full-time trader. The IRS treats Bitcoin and other cryptocurrencies as property, not currency. That single classification changes everything about how you report your crypto activity-and how much you might owe in taxes.

Why Bitcoin Isn’t Treated Like Cash

In 2014, the IRS dropped a bombshell in Notice 2014-21: virtual currencies are property. That means Bitcoin behaves like stocks, real estate, or collectibles for tax purposes, not like dollars or euros. If you use Bitcoin to buy groceries, you’re not just spending money-you’re selling an asset. And when you sell an asset, you either make a profit or take a loss. Both are taxable.

This rule hasn’t changed in over a decade. Even after the GENIUS Act passed in July 2025 and the CLARITY Bill moved through the House, the IRS held firm. Regulatory bodies like the SEC might classify some tokens as securities, but the IRS doesn’t care. For tax purposes, Bitcoin is property. Period.

Three Ways Bitcoin Can Be Classified

Not all Bitcoin is taxed the same. How it’s treated depends on how you use it:

  • Business property: If you mine Bitcoin as part of your business, the coins you earn are ordinary income. You report their fair market value on the day you receive them, and any future sale triggers capital gains.
  • Investment property: Most people fall here. If you buy Bitcoin hoping it will rise in value, it’s an investment. Sell after holding it more than a year? You get long-term capital gains rates-possibly as low as 0%. Sell within a year? You pay your regular income tax rate, up to 37%.
  • Personal property: Using Bitcoin to pay for a vacation or a laptop counts as a personal transaction. Even then, you still owe tax on any gain. The IRS doesn’t make exceptions for small purchases.

How to Calculate Your Gain or Loss

Every time you sell, trade, or spend Bitcoin, you need to figure out your cost basis and compare it to what you got in return.

Your cost basis is what you paid for the Bitcoin, including fees. Let’s say you bought 1 BTC in January 2023 for $25,000. Later that year, you bought another 0.5 BTC for $18,000. Your total basis is $43,000 for 1.5 BTC.

Now you sell 1 BTC for $30,000. How much gain do you report?

If you use specific identification, you can pick which unit you sold. You could choose the one bought for $25,000, so your gain is $5,000. But you need records to prove it-transaction IDs, wallet addresses, timestamps. No records? The IRS forces you to use FIFO (first-in, first-out). That means the first BTC you bought is the first one sold. In this case, you’d still report a $5,000 gain.

If you’d sold the 0.5 BTC bought for $18,000 instead, you’d have a $12,000 gain. The choice matters. That’s why record-keeping isn’t optional-it’s your legal defense.

Someone reviewing crypto transactions as an IRS agent watches, with a calendar marking trades and tax rules.

Long-Term vs. Short-Term Capital Gains

Holding Bitcoin longer than a year can save you thousands. Here’s what the 2024 tax rates look like:

Long-Term Capital Gains Tax Rates for 2024
Filing Status 0% Rate Up To 15% Rate Range 20% Rate Above
Single $47,025 $47,026-$518,900 $518,901
Married Filing Jointly $94,050 $94,051-$583,750 $583,751
Head of Household $63,000 $63,001-$551,350 $551,351
If you’re single and your total taxable income is $40,000, and you have $8,000 in long-term crypto gains, you pay 0% on those gains. But if your income is $60,000, the same $8,000 gain gets taxed at 15%.

Short-term gains? They’re added to your ordinary income. If you’re in the 32% tax bracket, every dollar of crypto profit you make in less than a year gets taxed at 32%.

Hard Forks, Airdrops, and Free Crypto

You get free Bitcoin from a hard fork? That’s taxable income.

A hard fork happens when a blockchain splits-like Bitcoin Cash splitting off from Bitcoin. If you don’t get any new coins, nothing to report. But if you receive new coins via an airdrop, the IRS says: you’ve earned income. The amount? The fair market value of the new coin on the day you could access and control it.

Say you received 5 BCH worth $200 on the day the fork occurred. You report $200 as ordinary income. Your cost basis in those 5 BCH is now $200. If you later sell them for $300, you have a $100 capital gain.

The IRS doesn’t care if you didn’t ask for it. If it shows up in your wallet and you can move it, it’s income.

What Counts as a Taxable Event?

You don’t need to sell Bitcoin to trigger a tax. Here’s the full list:

  • Selling Bitcoin for USD or any fiat currency
  • Trading Bitcoin for another cryptocurrency (e.g., BTC to ETH)
  • Using Bitcoin to buy goods or services
  • Receiving Bitcoin as payment for work or services
  • Mining Bitcoin
  • Receiving airdropped tokens
Even swapping one crypto for another is a taxable event. There’s no “like-kind exchange” exception anymore-that loophole closed in 2018 with the Tax Cuts and Jobs Act. You can’t defer taxes by trading Bitcoin for Ethereum anymore. Every swap is a sale.

Bitcoin coins turning into tax forms and symbols, with a lost wallet and capital gains highlighted.

Record-Keeping Is Non-Negotiable

The IRS doesn’t need to prove you made a mistake. You have to prove you didn’t. That means keeping records for every transaction since you first bought Bitcoin.

You need:

  • Date of each purchase and sale
  • Amount of Bitcoin bought or sold
  • Price in USD at the time
  • Wallet addresses involved
  • Transaction IDs
  • Purpose of the transaction (e.g., “paid for rent,” “traded for ETH”)
Most people use crypto tax software like Koinly, CoinTracker, or TokenTax. These tools pull data from exchanges and wallets, calculate gains and losses, and generate Form 8949 and Schedule D. The IRS doesn’t endorse any tool-but they do audit people who file incomplete or inaccurate returns.

What Happens If You Don’t Report?

The IRS added a simple question to Form 1040 in 2020: “At any time during 2024, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

Answer “no” when you should’ve said “yes”? That’s tax fraud. The IRS has been actively auditing crypto users since 2021. They’ve partnered with blockchain analytics firms like Chainalysis to trace transactions. Even if you used a non-KYC exchange, they can still find you.

Penalties can include:

  • 20% accuracy-related penalty on underpaid tax
  • 75% fraud penalty if the IRS proves intent
  • Criminal charges for willful evasion
The message is clear: don’t ignore it. The IRS knows you’re trading. They just need you to own up to it.

What’s Next?

The property classification isn’t going away. Congress might tweak rules around reporting thresholds or capital gains rates, but the core idea-Bitcoin is property-will stay. The IRS has spent over a decade building enforcement tools around this framework. They’re not going to abandon it now.

The real question isn’t whether the rules will change. It’s whether you’re ready to comply.

If you’re holding Bitcoin, you’re holding a taxable asset. Every transaction leaves a digital trail. Every gain, every loss, every airdrop-it all matters. The best defense isn’t ignorance. It’s documentation.

Is buying Bitcoin with USD a taxable event?

No. Buying Bitcoin with USD is not a taxable event. You’re exchanging one asset (cash) for another (Bitcoin). No gain or loss is recognized at this point. You only trigger taxes when you sell, trade, or spend the Bitcoin later.

Do I owe tax if I lose Bitcoin?

Losing access to Bitcoin (e.g., forgotten password, lost hardware wallet) is not a deductible loss under current IRS rules. You can’t claim a capital loss unless you’ve sold or exchanged the asset. If it’s gone and you can’t prove it was disposed of, you can’t deduct it.

Can I use crypto losses to offset stock gains?

Yes. Crypto capital losses can offset capital gains from stocks, real estate, or any other asset. You can also deduct up to $3,000 in net capital losses against ordinary income each year. Any excess losses carry forward to future years.

Do I need to report crypto received as a gift?

Receiving crypto as a gift is not taxable at the time of receipt. But when you later sell it, you must report the gain or loss based on the original donor’s cost basis and holding period. If the donor’s basis is unknown, you may need to use zero basis, which could result in a higher tax bill.

What if I only trade between cryptocurrencies?

Every trade between cryptocurrencies is a taxable event. Swapping BTC for ETH is treated as selling BTC for USD and then buying ETH with USD. You must calculate the gain or loss on the BTC you sold, even if you never touched fiat currency.

Are NFTs taxed the same way as Bitcoin?

Yes. NFTs are treated as property by the IRS. Buying, selling, or trading NFTs triggers capital gains or losses. If you create and sell an NFT as part of a business, the income is ordinary. If you buy and hold as an investment, it’s subject to capital gains rules.

by Brennan Lockridge
Crypto as Property: US Tax Treatment for Bitcoin