Tax Considerations When Investing in Bitcoin in the United States

Maria Okeke, CPA -

By Maria Okeke, CPA – Director of Finance, River Financial

Long-term investors interested in bitcoin may be wondering about the tax implications of investing in this asset class. Here are some key considerations to keep in mind when investing in bitcoin.

How does the IRS categorize Bitcoin?

According to the most recent IRS guidance, Bitcoin and other cryptocurrencies are considered property, and are therefore taxed according to the same rules as other investments like stocks.

What about taxes on Bitcoin gains?

Remember, because bitcoin is considered property, you'll have a capital gain or a capital loss every time you sell bitcoin. We’ll only focus on taxes related to trading/investing in bitcoin.

Capital gains on Bitcoin trades: A capital gain occurs when you sell bitcoin for more than you paid to acquire it. (Capital gain = cash from sale - cost basis)

  • Cost Basis: the amount you spent in USD plus any fees, commissions and other acquisition costs to acquire Bitcoin.
  • Short-term vs. long-term gain: If you held bitcoin for one year or less before selling or exchanging it, then you will have a short-term capital gain or loss. If your holding period was more than one year, then you will have a long-term capital gain or loss. Long-term capital gains are generally taxed at preferential rates, while short-term capital gains are generally taxed at ordinary income rates.
  • Reporting capital gains: Sales of property should be reported on your tax return using Schedule D and Form 8949. You'll show your capital gain or loss calculations on the form, per instructions.

Net Investment Income Tax: Some taxpayers may also be subject to an additional 3.8% tax on the net investment income or the amount by which your modified adjusted gross income exceeds the thresholds below based upon filing status, whichever is smaller.

If your income is above these thresholds, the net investment income tax may apply:

  • Single or head of household: $200,000
  • Married, filing jointly: $250,000
  • Married, filing separately (including qualifying widow(ers)): $125,000

Tools for Bitcoin tax reporting

The IRS tax guidelines for trading bitcoin are no different than the guidelines for investing/trading stocks and other property. Bitcoin tax reporting is included in your annual state and federal filings (due by April 15th of the following year). There are many online resources which will streamline crypto reporting for your personal tax return.

TurboTax is a popular choice for filing personal taxes and is equipped to calculate taxes owed from your bitcoin transactions. River is compatible with many cryptocurrency tax tools like Bitcoin.tax, CoinTracker, CryptoTrader, TokenTax or ZenLedger. All of these tools can be used to seamlessly populate your Bitcoin trades into TurboTax.

River eases the burden of tax reporting by providing an account transaction history export. This export can be easily uploaded into one of the cryptocurrency tax tools via .CSV. All of the information required by the IRS, including the transaction history export, can be found in the Accounts Dashboard of your River account.

Other tax considerations

Other transactions involving bitcoin which will trigger a taxable event include:

  • Paying for goods and services with bitcoin
  • Exchanging bitcoin for another cryptocurrency

Looking to get started investing in Bitcoin?

River provides an easy-to-use Bitcoin platform complete with performance tracking features to ensure you have the tools you need for tax reporting.

Notice: River Financial does not provide investment, financial, tax, or legal advice. The information provided is general and illustrative in nature and therefore is not intended to provide, and should not be relied on for, tax advice. We encourage you to consult the appropriate tax professional to understand your personal tax circumstances.