Bitcoin Taxes 2024: IRS Rules Explained + Easy Instructions

<div fs-richtext-component="info-box" class="info-box"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f4cef4c34160eab4440_Info.svg" loading="eager" width="64" height="64" alt="" class="icon-info-box"><div fs-richtext-component="info-box-text" class="info-box-content"><p class="color-neutral-800">Starting January 1, 2024, the Infrastructure Investment and Jobs Act requires reporting 10,000$+ crypto transactions to the IRS. Yet, the Treasury and IRS deferred digital asset reporting until new regulations are set, promising future guidance and public input on these rules. We keep you informed! </p></div></div></div>

Introduction

Since its inception in 2012, Bitcoin has captivated the financial landscape of the USA, transitioning from a novel digital curiosity to a mainstream asset. This journey, however, has not been without its complexities, especially in the realm of taxation. 

Initially, Bitcoin's unique nature left many investors and regulators in a state of uncertainty regarding its tax implications. Over the years, this ambiguity has gradually cleared as the IRS introduced and refined crypto tax rules in the US. This evolution marks a significant step in recognizing and integrating digital currencies within the formal financial system of the United States. Join us as we explore the current landscape of Bitcoin taxation, shedding light on the crucial regulations set by the IRS for 2024.

Want to learn more about Bitcoin? Read our full guide: What is Bitcoin?

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Understanding Bitcoin Taxation Basics

The IRS classifies Bitcoin and other cryptocurrencies as property for taxation purposes. This classification has significant implications for Bitcoin holders and traders when it comes to tax reporting and obligations. As property, Bitcoin transactions are subject to capital gains taxes, necessitating the use of various IRS forms for accurate reporting. 

These include Form 1099 for crypto income, Form 8949 for capital gains or losses, Form 1099-B for brokerage transactions, and specific forms for payments received in crypto, like Form 1099-MISC for services. Even NFT transactions require reporting via Form 1099-NEC. 

The tax impact of your Bitcoin activities hinges on factors such as transaction types, holding periods, and the cost basis of the cryptocurrency involved.

Read on to learn about Bitcoin taxation and how to report crypto on your tax return.

Bitcoin Capital Gains Tax

<div fs-richtext-component="tax-status-capital-gains-tax" class="tax-status-pills"><div>Capital Gains Tax</div></div>

The IRS distinguishes between short-term and long-term capital gains for Bitcoin transactions based on the holding period. 

Any Bitcoin held for less than a year before being sold or exchanged is subject to short-term capital gains tax, ranging from 10% to 37%.

If you held Bitcoin for more than a year, long-term capital gains tax applies, ranging from 0% to 20%. 

The actual tax rates are based on your total taxable income.

As you can see, short-term and long-term capital gains tax rates are a crucial concept than can heavily influence the amount of tax owed on Bitcoin profits.

Bitcoin Tax Rates for Tax Year 2022 / 2023

Bitcoin Short-Term Capital Gains Tax Rates

Bitcoin short-term capital gains (Bitcoin held for less than one year) are taxed at the taxpayer’s ordinary income tax rate, which ranges from 10% to 37%.

2022 Short-Term Federal Income Tax Rate Brackets:

2023 Short-Term Federal Income Tax Rate Brackets:

Bitcoin Long-Term Capital Gains Tax Rates

Bitcoin long-term capital gains (assets held for more than one year) are taxed at a lower rate, ranging from 0% to 20% based on the taxpayer’s income.
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2022 Long-Term Federal Income Tax Rate Brackets:

2023 Long-term Federal Income Tax Rate Brackets:

Learn more about capital gains tax and income tax: IRS Crypto Tax Rates

How to Calculate Bitcoin Capital Gains

Bitcoin capital gains are calculated based on the cost basis at the time of purchase and the fair market value (FMV) at the time of the sale/exchange.

The capital gains formula is straightforward: Simply subtract your cost basis from the fair market value. If the result is positive, it's a gain, if it is negative, it's a loss.

Maintaining precise documentation of every Bitcoin transaction, noting the date, amount, FMV, and cost basis, is crucial for accurately determining your capital gains or losses.

<div fs-richtext-component="info-box" class="info-box protip"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f4b151815fb0be48cec_Lightning.svg" loading="eager" width="64" height="64" alt="" class="icon-info-box"><div fs-richtext-component="info-box-text" class="info-box-content"><p class="color-neutral-800">Blockpit's crypto portfolio tracker takes care of record keeping for you. Automatically import transactions from exchanges and wallets and let the portfolio tracker handle the rest.</p></div></div></div>

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Mining Bitcoin: Earnings and Tax Implications

<div fs-richtext-component="tax-status-income-tax" class="tax-status-pills"><div>Income Tax</div></div>

The IRS considers Bitcoin mining rewards as taxable income, assessed at their value when received. These should be declared either as self-employment income or as miscellaneous income, depending on the miner's circumstances. 

Bitcoin miners may also deduct related expenses, such as equipment and electricity costs, as business expenses.

Bitcoin mining taxation is a complex topic, which is why we've written a separate tax guide for it: Crypto Mining Taxes

Bitcoin Gifts and Donations

<div fs-richtext-component="tax-status-tax-free" class="tax-status-pills tax-free"><div>Tax Free</div></div>

Receiving Bitcoin as a gift comes with no immediate tax implications for the recipient, as it's not considered taxable income upon receipt. The recipient inherits the giver's cost basis for the Bitcoin, or if unknown, it's determined by the Bitcoin's fair market value on the day of receipt.

Givers can donate up to 17,000$ per person annually without incurring gift tax, under the annual gift tax exclusion. If the donation exceeds this amount but doesn't surpass the lifetime gift tax exemption of 12.92 million$ in 2023, no gift tax is required, although Form 709 may need to be filed.

Donating Bitcoin to a recognized nonprofit, which can be verified through the IRS's database of exempt organizations, offers tax benefits without triggering capital gains tax. Such donations are tax-deductible, based on the crypto's fair market value on the donation day. For donations over 500$, Form 8283 must be completed. Additionally, for donations valued more than 5,000$, the IRS mandates obtaining a qualified appraisal for deduction claims. This structured approach enables both donors and recipients to efficiently manage Bitcoin transactions while optimizing tax advantages and responsibilities.

Bitcoin Forks and Tax Implications

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A Bitcoin hard fork represents a significant protocol change leading to the creation of a new cryptocurrency by altering the blockchain's rule set. Unlike soft forks, which adapt without excluding the old rules, hard forks require unanimous network consensus to adopt new regulations, resulting in the division of the cryptocurrency network into two separate entities.

Bitcoin Cash stands as the most notable success among Bitcoin hard forks.

For Bitcoin holders, hard forks carry specific tax implications. The IRS treats new cryptocurrencies received from hard forks as taxable income, assessed at their fair market value at the time of the fork.

This approach requires holders to maintain detailed records of the fork's occurrence and the received cryptocurrency's value to accurately report potential income. Moreover, any subsequent sale or exchange of the new cryptocurrency could trigger capital gains taxes, emphasizing the importance of diligent documentation for compliance with IRS regulations.

Bitcoin Losses, Thefts, and Frauds

Bitcoin losses can be used to offset gains on your tax return. You can deduct up to 3,000$ in Bitcoin losses against your ordinary income if your losses are greater than your gains.

If you have losses left over, you can carry them forward to future years. It's important to keep accurate records and report these losses correctly.

It's also worth mentioning that you can't use crypto losses to lower taxes on gains from other types of investments.

The rules changed for cryptocurrencies that are lost or stolen. The Tax Cuts and Jobs Act removed the ability to claim these as capital losses. But, if you faced losses before 2017, you might still be able to get deductions with the right paperwork.

Now, investors can't deduct losses from theft, scams, or losing their private keys. However, selling assets that have lost value can create a capital loss, which might offset other gains. Another strategy is to transfer tokens that aren't listed on exchanges to non-custodial wallets or send them to a burn wallet, which can be a way to record a loss.

Learn more about balancing losses and gains: Offsetting Crypto Losses

How to Optimize Your Bitcoin Taxes

Holding Period Strategy: To potentially lower your tax burden, consider holding your Bitcoin for over a year. This method may qualify your profits for the reduced rates of long-term capital gains tax.

Tax Loss Harvesting Approach: Employ tax loss harvesting by selling other cryptocurrencies at a loss to counterbalance the gains from your Bitcoin holdings.

Portfolio Management: Utilize a crypto tax calculator for frequent analysis and adjustment of your Bitcoin portfolio. This process should account for the tax consequences of transactions, aiming to optimize your tax responsibilities.

Bitcoin Tax Deadlines in the US

Bitcoin and other cryptocurrency transactions share the same tax deadlines as traditional investments in the US.

Key dates include:

• April 15: The primary tax filing deadline for US individuals, applicable to those with Bitcoin income.
• June 15: Deadline for US citizens and residents abroad to file their taxes, including Bitcoin earnings.
• October 15: The final submission date for those who requested a tax extension.

These deadlines encompass income from Bitcoin trading, mining, staking, and more. Timely tax filing and payment are crucial to prevent late fees and penalties.

How to Report Bitcoin Taxes to the IRS

To file your Bitcoin taxes with the IRS, it's necessary to declare any capital gains or losses on your tax return.

Follow these steps for Bitcoin tax reporting:

1. ‍Complete Form 8949: Document your capital gains or losses from Bitcoin transactions on Form 8949.‍
2. Transfer to Schedule D: Move the details from Form 8949 to Schedule D to summarize your overall capital gains or losses.‍
3. Fill Out Form 1040: Report your total income, incorporating the capital gains or losses from Bitcoin, using Form 1040.‍
4. Submit Your Tax Return: Ensure your tax return is filed by the deadline, typically April 15th, or apply for an extension if required.

Accurate record-keeping of all Bitcoin transactions, noting the purchase and sale prices, dates, and other relevant details, is critical for proper IRS reporting.