IRS Bitcoin Tax Guide: How to Report Crypto to the IRS

If you own Bitcoin or any other crypto, the IRS expects you to treat it like property for tax purposes. That means every sale, trade, or use of crypto can trigger a tax event. Ignoring these rules can lead to penalties, interest, and a lot of unwanted paperwork.

What the IRS Calls Bitcoin

In 2014 the IRS issued Notice 2014‑21, stating that virtual currencies are property, not currency. So when you sell Bitcoin for cash, swap it for another crypto, or even use it to buy a coffee, you’re creating a capital gain or loss. The gain is the difference between what you paid (your cost basis) and what you received.

If you held the Bitcoin for a year or more before disposing of it, the gain is taxed at long‑term capital‑gain rates (0%, 15%, or 20% for most people). Anything held for less than a year is taxed at ordinary income rates, which can be as high as 37%.

How to Report Bitcoin on Your Tax Return

First, gather every transaction. Exchanges, wallets, and broker‑age platforms usually provide CSV files that list buys, sells, and trades. You’ll need the date, amount of Bitcoin, fair market value in USD at the time, and any fees you paid.

Next, calculate the gain or loss for each event. Most taxpayers use tax software that supports crypto, but you can also do the math in a spreadsheet. Once you have the totals, you’ll fill out Schedule D (Capital Gains and Losses) and Form 8949 (Sales and Other Dispositions of Capital Assets). On Form 8949, list each transaction, the type of gain (short‑ or long‑term), and the amount.

Don’t forget about crypto received as income. If you earned Bitcoin through mining, staking, or airdrops, the value at receipt is ordinary income and must be reported on Schedule 1 or the appropriate wage line. That income also starts the cost basis for future sales.

Finally, keep records for at least three years. The IRS can audit you, and if they ask for proof, you’ll need transaction logs, exchange statements, and any receipts showing how you calculated the basis.

Here’s a quick checklist to stay on the safe side:

• Export all transactions from every exchange and wallet you used.
• Convert each transaction to USD using the spot price on the transaction date.
• Separate short‑term and long‑term gains on Form 8949.
• Report mining, staking, or airdrop earnings as ordinary income.
• File Schedule D and attach Form 8949 to your 1040.
• Store all records for three years or longer.

Common mistakes include forgetting small trades, treating crypto like foreign currency, or using the wrong cost basis. Even a $50 trade counts, and the IRS can add up those tiny events.

If you’re unsure, consider using a crypto‑friendly accountant. They can double‑check your numbers and help you avoid costly errors. Remember, the IRS is cracking down on crypto non‑compliance, so playing it straight now saves you headaches later.

Bottom line: treat every Bitcoin move as a taxable event, keep solid records, and report everything on the right forms. By following these steps, you’ll stay on the IRS’s good side and keep more of your crypto earnings in your pocket.