Cryptocurrencies and Taxes: What You Should Know

What began in 2009 with a single virtual currency—Bitcoin—has grown to comprise some 2.5 million cryptocurrencies¹ totaling more than $2.41 trillion² in assets. But know this: All that virtual activity has real-life tax consequences.

If you make money on a cryptocurrency transaction and don't report the capital gains or income, you could be in hot water. Let's look at crypto taxes—and how to avoid running afoul of the IRS.

The IRS treats cryptocurrencies as property, not as a currency, meaning any transactions that use crypto will be subject to the capital gains tax rules.

Most people don't think of shopping as a taxable event, but it can be if you use virtual currencies. When you buy something with cryptocurrency, you're effectively selling a portion of your crypto holdings and using the proceeds to cover the cost of the purchase.

Whether the transaction results in a gain or a loss is calculated by taking the difference between the fair market value of the goods or services you purchased and your adjusted cost basis for the crypto used in the transaction—generally the amount you paid for your cryptocurrency, plus any fees.

For example, let's say you use bitcoin to purchase a $45,000 car. You originally purchased that bitcoin on an exchange for $40,000, so buying the car resulted in a $5,000 gain (ignoring transactions costs). If you held the bitcoin for a year or less, the tax on the gain would be subject to the short-term capital gains rate, which is the same as your ordinary income tax rate—up to 37% for 2024 and 2025. Had you held the bitcoin for more than a year, you would owe the current long-term capital gains tax of 0%, 15%, or 20%, depending on your tax bracket. You may also have to pay the 3.8% net investment income tax on your gains if your taxable income is over certain levels.

But what if the initial value of the bitcoin was $50,000? In this case, paying $45,000 in bitcoin for the car would result in a $5,000 capital loss, which you could use to potentially offset capital gains and then up to $3,000 of ordinary income. You can carryover any remaining loss to the next year to offset future income. That said, since cryptocurrencies are considered property and not a "security," any crypto losses are generally exempt from wash-sale rules.

If you operate a business that accepts cryptocurrencies as payment for goods or services, you may face some unexpected tax consequences. As with any business transaction, the IRS sees all exchanges with customers as a taxable event, no matter if it involves cash, credit, bartering, or crypto. When a customer or client pays you in crypto, the income you realize is based on the currency's fair market value at the time of the transaction and will be included in your gross business income.

Since the crypto is property and not a currency, another issue to be aware of is the potential for a capital gain or loss when you eventually sell the crypto you received. For example, you sell a mountain bike for $6,000, which the buyer pays in bitcoin. Because you purchased the bike for $4,000, you now have $2,000 of taxable ordinary income on that sale.

But your crypto tax implications don't end there. Let's say you hold the bitcoin for six weeks. Its value goes up to $7,500 during that time, and you decide to sell it. Your cost basis for the bitcoin is $6,000, the fair market value on the date you received payment for the mountain bike, resulting in a $1,500 taxable short-term capital gain.

While we recommend all business owners work with a tax professional, if your business accepts cryptocurrency, it's doubly important to have a tax advisor who understands how virtual currencies could impact your taxes.

Currently the majority of the burden for tax reporting on crypto transactions lands on the individual taxpayers—tax-reporting guidelines for crypto brokers/exchanges is a bit inconsistent, at least right now.

Even if you are provided with a tax-reporting form on your crypto transactions (generally a Form 1099-K), it likely won't have all the information needed to determine you tax liability, such as your cost basis. Starting in 2025, however, cryptocurrency brokers/exchanges will need to track certain digital asset sales and transactions and report them to you and the IRS on the new Form 1099-DA.

But remember, it doesn't matter if you receive a Form 1099 or not—all crypto transactions are taxable events that you need to report to the IRS on your personal tax return.

Be sure to keep receipts and confirmations for every crypto purchase and sale for tax purposes. Whether intentional or not, any instance of underreported crypto income is considered tax evasion, so you'll want to take it seriously.

Also, crypto tax rules are ever-evolving, so if you're not sure how to report your crypto transactions properly, work with a tax advisor—and potentially file an amended return for any past missteps.