The end of the year is just around the corner, and many people are starting to think about filing taxes. Now is an ideal time to do the same, so you don’t feel time-pressed when the filing deadline rolls around. Here, we’ll look at how to deal with your bitcoin investments.
Indicating bitcoin investments on your taxes
Being a bitcoin investor doesn’t mean you can get away with not reporting those investments on your taxes. But, there are a few specifics to keep in mind. Most notably, the IRS determined cryptocurrencies are property or stock. In other words, you treat bitcoin transactions the same as property transactions for income tax purposes.
In addition to paying taxes on your bitcoin investments, you also need to keep records of relevant activity. That’s due, in part, because the taxed rate depends on how long you hold the bitcoin. If you invest in bitcoin and keep it for at least a year before selling it, you pay 15 to 20 percent in taxes on your gains according to your income bracket.
But if you have the bitcoin for less than a year before selling, it gets taxed as ordinary income. These specifics show why it’s crucial to keep accurate records about all your bitcoin investments.
If bitcoin goes down in value before it leaves your possession after a sale, it’s a capital loss rather than a gain. Then, the loss gets deducted from your taxable income — as long as your losses are less than $3,000. Any amount more than that gets rolled over to the next year.
One thing to keep in mind regarding all this is that you pay taxes on your bitcoin investments when selling them or exchanging them for cash. Keeping thorough and accurate records will make it substantially easier to ensure you’re meeting your tax burden, making you less likely to encounter confusion.
Getting paid in bitcoin
If your employer pays you in bitcoin, it’ll submit W-2 forms to the government with the amounts converted in U.S. dollars. You get taxed on any bitcoin earnings the same as you would if they were in dollars.
Perhaps you work as a freelancer, and someone paid you for services with bitcoin. If you receive any bitcoin, there’s an extra step to take when calculating your gross income for the IRS. You’ll need to indicate the fair market value of your bitcoin in U.S. dollars on the day you received payment.
Fortunately, information about fair market value for cryptocurrencies is available online. It measures fair market value based on the current real-world usage of each coin.
If you earned bitcoin by mining it, the process is similar because you need to calculate your gross income by determining the fair market value on the day you mined it, then calculate the amount into U.S. dollars. In this case, you report the income as a self-employed person and may be able to deduct some of your expenses from your activities done for mining as a business model.
However, if you’re only treating Bitcoin mining as a hobby and not a business, you report associated earnings on Form 1040 under the “Other Income” section. Doing that means you won’t get to deduct business expenses, though.
Until recently, people who reported some hobbies on that section of Form 1040 could deduct a few specific things. But, that allowance recently got suspended for the majority of taxpayers through 2025.
What about your state taxes and bitcoin?
Things are not as straightforward regarding state taxes and how to report bitcoin payments. That’s because, like the stipulations for state sales tax, they differ depending on where you live.
For now, though, far more states have sales tax compared to those that made decisions about Bitcoin for tax purposes. For example, only five states do not have sales tax. And, even fewer have started ironing out cryptocurrency-specific state tax rules.
Vermont, Wyoming and Nevada are the only three states to do so thus far. Analysts predict more states will follow their lead as cryptocurrency becomes more widely used, however. You should aim to stay abreast of state-level bitcoin news, and never assume nothing new has happened in that area since you last filed taxes.
Tax deductions when Making charitable donations with cryptocurrency
As mentioned earlier, you pay capital gains taxes on cryptocurrency investments when you sell them. However, there’s a way around that. You can donate your cryptocurrency directly to a charity. Doing that gives you an instant tax deduction on the entire donated amount.
Although charities have different procedures surrounding what they do with charitable donations given to them in cryptocurrencies, most quickly convert them to cash. Some have partnerships with cryptocurrency exchanges that help them do that as seamlessly as possible. Cashing out without delay lets charities avoid the market volatility associated with cryptocurrencies.
The incentive of tax deductions encourages many people to donate to charities. The ability to do it by contributing bitcoin or another cryptocurrency your charity of choice accepts may shape your donation habits.
Crypto investments don’t get you off the hook for taxes
An essential thing for you to remember, besides these tax specifics, is that you shouldn’t think you can hide your cryptocurrency investments from the IRS.
This year, the agency began sending warning letters to people they believe may not have been upfront with their cryptocurrency holdings. Whether or not you received one of those letters, it’s always best to do what’s necessary to understand and fulfill your tax obligations.
Fortunately, there are resources you can avail yourself of if you need more help. Many attorneys and accountants specialize in helping clients who have cryptocurrencies. If you can’t find one where you live, some offer online consultations and serve people throughout the United States.
There’s also a company called TokenTax whose online platform can guide you through the process of declaring cryptocurrency investments on your taxes. It has a feature that allows you to import crypto trading activity data from any exchange.
It’s worth looking into apps that help you keep records about your cryptocurrency transactions, too. Many have tax-related capabilities that help you figure out your tax obligations and keep all the data in one place for easy reference.
Plan now to avoid feeling overwhelmed
Filing taxes can make people feel uncertain, even if they don’t have cryptocurrencies. However, one of the most straightforward ways to avoid the panic tax time can bring is to start getting your records in order now.
Also, if questions arise that this guide hasn’t covered, seek help now instead of waiting until the last minute. Planning is an excellent way to feel as confident as possible about submitting your tax returns without getting stressed.