Yes, you generally have to pay taxes on Bitcoin when you "cash out" (sell for fiat currency like USD) because the IRS treats crypto as property, making it a taxable event, usually resulting in a capital gain or loss that must be reported on your tax return, similar to stocks. You pay tax on the profit (gain) when its fair market value is higher than your purchase price (cost basis) and you'll need to report these transactions on forms like Schedule D (Form 1040).
Had you held the crypto for more than a year, you would owe the current long-term capital gains tax of 0%, 15%, or 20%, depending on your tax bracket. You may also have to pay the 3.8% net investment income tax on your gains if your total taxable income is over certain levels.
You must report income, gain, or loss from all taxable transactions involving virtual currency on your Federal income tax return for the taxable year of the transaction, regardless of the amount or whether you receive a payee statement or information return.
According to the ATO, cryptocurrency is both an asset and digital money. And why does that seem so wrong? It's so that they can get more tax from you. Bitcoin is an asset, like property or vehicles, so when you sell it, you have to declare it as capital gain, so you pay capital gains taxes.
You're required to report all of your cryptocurrency income, regardless of whether your exchange sends you a 1099 form. If you make less than $600 of income from an exchange, you should report it on your tax return.
On a $100,000 capital gain, you'll likely pay 15% for long-term gains, resulting in about $15,000 in federal tax (plus potential state tax), but it could be 0% or 20% depending on your total taxable income and filing status, while short-term gains are taxed as ordinary income (potentially 22-24%).
1 - Buy and Hodl your crypto investments for the long term
If you buy and never sell (including no crypto to crypto trades or other disposal events), then there are no tax events. So one of the simplest strategies to avoid paying crypto taxes, is to simply buy and hold your crypto.
The "crypto 30-day rule" refers to the IRS wash-sale rule, which does not apply to cryptocurrencies, treating them as property, not securities, allowing investors to sell at a loss and immediately buy back the same crypto to realize the loss for tax purposes (tax-loss harvesting) without waiting 30 days, unlike stocks. However, some tax authorities (like the UK's HMRC and Lanop or local interpretations) may have their own "bed and breakfast" rules that match sales and purchases within 30 days, affecting capital gains, so it's crucial to check specific tax jurisdictions.
The IRS can and does track crypto by combining blockchain analysis with user data from crypto exchanges. Centralized exchanges must report user activity directly to the IRS, via Form 1099-DA and 1099-MISC. Failure to report can lead to audits, back taxes, penalties, and even criminal prosecution.
You can use a crypto exchange like Coinbase, Binance, Gemini or Kraken to turn Bitcoin into cash. This may be an easy method if you already use a centralized exchange and your crypto lives in a custodial wallet. Choose the coin and amount you'd like to sell, agree to the rates and your cash will be available to you.
Additional losses can be carried forward to future years. Holding cryptocurrency for 12 months or longer qualifies you for lower long-term capital gains tax rates. Selling crypto in a year when your income is lower can reduce the taxes you owe. Gifting cryptocurrency is generally not a taxable event for the giver.
For crypto transactions you make in a tax-deferred or tax-free account, like a Traditional or Roth IRA, respectively, these transactions don't get taxed like they would in a brokerage account. These trades avoid taxation. Depending on your income each year, long-term capital gains rates can be as low as 0%.
If you received crypto as income, you do need to report it as income, even if you didn't sell it. Crypto accounting, simplified. Buy, hold, and breathe easy. You don't have to report crypto on your taxes if you only bought and held it without selling.
You're required to pay tax on the profit you made from your sale (total sale price of your cryptocurrency minus original purchase price), commensurate with your personal tax bracket. So under these rules, you may be looking at quite a large capital gains tax assessment.
Common Triggers
Individuals investing in Crypto should be aware of the following common errors that may trigger IRS scrutiny: Failure to Report Crypto Assets on Form 1040: Taxpayers must answer the digital asset question each year. Leaving it blank or ignoring it, even if no transactions occurred, can raise red flags.
The total Capital Gains Tax you owe from trading crypto depends on how much you earn overall every year (i.e. your salary, or total self-employed income plus any other earnings). This number determines how much of your crypto profit is taxed at 18% or 24%. Our capital gains tax rates guide explains this in more detail.
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If you use your former home to produce income (for example, you rent it out or make it available for rent), you can choose to treat it as your main residence for up to 6 years after you stop living in it. This is sometimes called the '6-year rule'. You can choose when to stop the period covered by your choice.
Any profits on your assets, including those from additional properties, will be taxed at 18% for basic rate taxpayers or 24% if you're a higher or additional rate taxpayer. For the 2025/2026 tax year, you'll get a tax-free allowance of £3,000 and this is offset against any gains.