Crypto as Property: US Tax Treatment for Bitcoin

Every time you buy coffee with Bitcoin, sell Ethereum for dollars, or receive new coins from a hard fork, the IRS sees a taxable event. Not because it’s money - but because it’s property. That’s the rule the IRS has stuck with since 2014, and it’s still the law in 2025. No matter how many bills Congress passes or how many exchanges launch new features, your Bitcoin is treated like a stock, a piece of art, or a vintage car - not cash. And that changes everything.

Why Bitcoin Isn’t Currency for Tax Purposes

The IRS made this clear in Notice 2014-21: virtual currencies are property. That means when you trade Bitcoin for goods, services, or even another crypto, you’re not just moving money around. You’re selling an asset. And selling an asset triggers a capital gain or loss - just like selling shares of Apple or a painting you bought at a garage sale.

This isn’t a loophole or a gray area. It’s the foundation of how the U.S. taxes crypto. Even after the GENIUS Act passed in July 2025 and the CLARITY Bill moved through the House, the IRS didn’t budge. They still treat Bitcoin as property. The SEC might call a token a security. The CFTC might call it a commodity. But for taxes? It’s property. Always.

Three Ways Bitcoin Can Be Classified (And What It Means for Your Taxes)

Not all Bitcoin is taxed the same. How you use it determines whether you pay ordinary income rates or lower capital gains rates.

• Business property: If you mine Bitcoin as part of your business - say, you run a rig farm in Texas and sell the output - then the coins you mine are business income. You pay ordinary income tax on their fair market value when they hit your wallet. When you later sell them, you’ll owe capital gains on the difference between that value and your sale price.
• Investment property: Most people fall here. You bought Bitcoin because you thought it’d go up. You didn’t use it to pay for groceries. You held it. Now you’re selling. If you held it more than a year, you get long-term capital gains rates: 0%, 15%, or 20%, depending on your income. If you held it less than a year? You pay your regular income tax rate - up to 37%.
• Personal property: You used Bitcoin to buy a laptop, a flight, or a pair of sneakers. That’s still a taxable event. You have to calculate the gain or loss based on what you paid for the Bitcoin versus its value at the time of purchase. Yes, even a $50 coffee can trigger a tax bill if your Bitcoin has gone up since you bought it.

How to Calculate Your Gain or Loss

Here’s where it gets messy. Let’s say you bought 1 BTC in April 2023 for $20,000. Then you bought another 1 BTC in June 2023 for $18,000. Now, in November 2025, you sell 1.5 BTC for $32,000. What’s your gain?

The IRS doesn’t let you pick which coins you sold unless you can prove it. If you don’t track which coins you spent, you’re stuck with FIFO - First In, First Out. That means the first 1 BTC you bought ($20,000) is sold first, then half of the second purchase ($9,000). Your total cost basis is $29,000. You sold for $32,000. Your gain? $3,000.

But if you kept perfect records - and you can prove you sold the June 2023 coins (worth $18,000) plus half of the April coins ($10,000) - your basis is $28,000. Gain? $4,000. You can’t just guess. You need to know exactly which units you disposed of.

Hard Forks and Airdrops: When You Get Free Crypto

When a blockchain splits - like Bitcoin Cash from Bitcoin in 2017 - you might get new coins. The IRS says: if you didn’t get them, you owe nothing. But if you received new coins in an airdrop? That’s ordinary income.

Say you held Bitcoin when Ethereum Classic split off from Ethereum in 2016. You got 10 ETC. On the day you got it, ETC was worth $50. You report $500 as income. Your basis in those ETC coins? $500. If you later sell them for $1,000, you have a $500 capital gain.

This applies to any airdrop - whether it’s from a fork, a promotion, or a token swap. If you have control over the new coins, the IRS sees income. No exception. No “but I didn’t ask for it” defense.

What You Need to Track - And Why Most People Get It Wrong

The IRS doesn’t care if you use Coinbase, Kraken, or a self-custody wallet. If you transact, you report. And you need records for every single one.

• Date you bought the Bitcoin
• How much you paid (in USD)
• How much Bitcoin you bought
• Date you sold or spent it
• What you got in return (USD, another crypto, goods)
• Value of what you received at the time

Most people don’t keep this. They just log into their exchange and see a balance. Big mistake. Exchanges don’t track your basis. They don’t know if you bought Bitcoin on Bitstamp in 2019 or transferred it from a cold wallet. The IRS expects you to know.

That’s why crypto tax software like Koinly, CoinTracker, or ZenLedger is so popular. They connect to your wallets and exchanges, stitch together your history, and spit out Form 8949 and Schedule D. The IRS doesn’t endorse any tool - but they do expect you to use something.

What’s Not Taxed (And What People Think Is)

There are a few myths floating around.

• Buying Bitcoin with USD isn’t taxable. True. You’re just exchanging one asset (USD) for another (BTC). No gain, no loss.
• Transferring Bitcoin between your own wallets. Not taxable. Moving it from Coinbase to Ledger? No sale. No tax.
• Using Bitcoin to buy another crypto. Totally taxable. Trading BTC for ETH? That’s two sales: BTC to USD, then USD to ETH. You owe tax on the BTC gain.
• Receiving Bitcoin as payment. You owe income tax on its value at the time you received it. If you’re a freelancer and get paid in BTC? That’s ordinary income. Record it.

Why This System Is So Hard to Live With

Imagine if every time you spent cash, you had to calculate whether you made a profit on the dollar bills you used. That’s what crypto tax feels like. You buy a coffee with Bitcoin that you bought for $10. Today it’s worth $60. You just triggered a $50 capital gain. You didn’t make money in the way you think. You just bought coffee. But the IRS doesn’t care. They see a sale.

Tax professionals call it the “every transaction is taxable” problem. Unlike stocks, where you might hold for years and only report when you sell, crypto forces you to track every single use. A trader with 500 transactions a year? That’s 500 taxable events. That’s a nightmare.

And enforcement is ramping up. The IRS added a question to Form 1040 in 2020: “At any time during 2024, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” Answer “no” when you should’ve said “yes”? You’re on their radar.

What’s Next? Will It Change?

There’s pressure to fix this. The CLARITY Bill proposed exempting small crypto transactions under $200 from capital gains tax. The GENIUS Act created clearer rules for crypto exchanges and miners. But none of them changed the core rule: Bitcoin is property.

The IRS has said they’re studying the issue. But they’ve been studying it since 2014. And they haven’t changed their mind. Even if Congress passes a bill, the IRS controls the tax code interpretation. Unless they issue a new notice - and there’s no sign they will - the property rule stays.

The bottom line? You’re not going to avoid this. You’re not going to outsmart it. The system is complex, outdated, and burdensome - but it’s the law. And if you own Bitcoin, you’re part of it.