If you own a cryptocurrency like Bitcoin, and you’re willing to sell it, you need to know how it could affect your annual taxes.
The selling part is easy. If you have an account with a major exchange or bank like SoFi, you have many options about how you want to execute a trade and what to do with the proceeds. These apps will also generate your year-end tax forms (generally Form 1099-DA) to make it easier to calculate exactly what you owe.
Bitcoin and other cryptocurrencies are treated as digital assets Describe the IRS As “any digital representation of value that is recorded in a distributed ledger secured by cryptographic, or similar technology.”
As assets, selling them makes them subject to capital gains taxes, rather than adding them to your taxable income.
How Bitcoin Capital Gains Taxes Work
Capital gains tax, as the name suggests, is a tax on the gains in value between the time an asset is purchased and the time it is sold. (For simplicity, we’ll focus on federal taxes, although many of these ideas apply to state taxes as well.)
Let’s say you bought some Bitcoin for $1,000. The value of this amount of cryptocurrency has doubled, and you decide to sell the entire stake for $2,000. You will only pay taxes on the $1,000 profit. The other $1,000 you paid in Bitcoin is yours Cost basis.
In the United States, capital gains are taxed differently than income depending on how long you have owned the asset.
If you hold Bitcoin for less than a year, your gains will be considered short-term, and the $1,000 gain will be taxed as part of your income for the year. If you also have significant income from other sources, you will also be subject to the net investment income tax, which adds another 3.8% to your tax bill.
If you hold your Bitcoin for 366 days or more, you pay long-term capital gains, which range between 0% and 15% and 20%, depending on your income level. Of that $1,000 profit, you may have nothing, or $200 at most.
What happens if you bought Bitcoin for $1,000, and by the time you’re ready to sell, the price has dropped to $500? In this case, you have incurred a capital loss, which you can use as a deduction from your tax bill.
according to IRSyou can deduct up to $3,000 per year in losses against your income tax bill, and if the loss exceeds $3,000, you can carry that loss over to future years. If you bought $10,000 worth of Bitcoin and the price collapsed so that you sold your holdings for $1,000, you could write off $3,000 on your income taxes for the year you sell and the following two years.
| Holding period | Tax type | Federal tax rate (2026) |
|---|---|---|
| Less than 1 year | Short-term capital gains | Same income tax bracket as yours (10%-37%) |
| 1 year or more | Long-term capital gains | 0%, 15%, or 20% (based on income) |
Beware of the Bitcoin tax any time you “dump” cryptocurrencies
Since Bitcoin is also a currency, you can use it to buy things, and this represents an evolution in how you calculate your taxes.
IRS He explains“If you pay for services using digital assets, you have disposed of the digital assets in exchange for the services provided and will have a capital gain or loss on the disposition.”
So, in plain English, this means that if you use your bitcoin to buy a Lamborghini, you must pay a capital gain on the difference between the amount of money you paid for the bitcoin and the amount it was worth when you paid for the Lamborghini.
Example: the “act” rule.
- Step 1: You can buy $10,000 worth of Bitcoin.
- Step 2: The value of Bitcoin rises to $200,000.
- Step 3: You trade Bitcoin directly for a car.
- a result: Even though you didn’t “cash out” to a bank account, the IRS considers this a sale. You owe capital gains tax on the $190,000 profit.
When you’re a buy-and-hold investor, your tax situation is likely to be fairly straightforward. But if you trade a lot, or if you use the bitcoin in your wallet to buy things, you’ll need to keep careful records of all your transactions.
If you don’t specifically identify which units (also known as lots) you sold, the IRS generally assumes the oldest units in that portfolio or account will be treated as sold first, which can significantly increase your cost basis.
To track your winnings, it is important to keep detailed records of each transaction, including the date, the amount of the cryptocurrency, its USD value at the time of the transaction, and the wallet or exchange you used for each purchase, sale, or exchange. Make sure to keep your accounts with trusted parties like SoFi for the best customer service.
The more information you have about your Bitcoin transactions, the better prepared you will be to minimize your tax taxes at the end of the year.
To accurately track your gains, keep records of the following:
- Transaction date: When the purchase, sale or exchange occurred.
- Asset amount: The specified amount of cryptocurrency (for example, 0.05 BTC).
- Cost basis: The value of the US dollar at the time of purchase.
- Fair market value: The value of the US dollar at the time of sale or “disposal”.
- Platform details: What wallet or exchange was used to trade.
Frequently Asked Questions: Bitcoin Taxes
Does the IRS know if you buy Bitcoin?
Yes. Every legally operating US-based cryptocurrency exchange, which includes all major coins from Coinbase to SoFi, is required by the SEC and FinCEN to collect KYC (Know Your Customer) information. As of tax year 2025, this now occurs via IRS Form 1099-DA, which reports gross proceeds from digital asset transactions.
What happens if I don’t report Bitcoin on my taxes?
Contrary to popular belief, it’s relatively easy for governments to track Bitcoin transactions, especially if you’ve traded on a US-regulated exchange. If you don’t pay your taxes, you could be subject to an IRS audit, back taxes, fines, and even jail time.
How many bitcoins are left?
To date, more than 19.99 million Bitcoins have been traded. There is an upper limit of 21 million Bitcoins that will be in circulation based on how its software is written. As the number of bitcoins available for mining decreases, they become more difficult to mine, so it takes longer for new bitcoins to enter circulation. Experts estimate that the last Bitcoin will be mined sometime before 2140.