Every time you buy a coffee with Bitcoin, sell Ethereum for dollars, or get new coins from a hard fork, the IRS sees a taxable event. Not because you made a profit - but because Bitcoin is property, not money. That single rule from a 2014 IRS notice still governs how millions of Americans report their crypto transactions in 2026, and it’s more complex than most people realize.

Why Bitcoin Isn’t Treated Like Cash

The IRS made its position clear in Notice 2014-21: virtual currencies are property. That means Bitcoin doesn’t get the same tax treatment as US dollars. If you spend $50 in cash at a grocery store, you don’t report a gain or loss. But if you spend $50 worth of Bitcoin you bought for $30, you owe taxes on the $20 gain - even though you didn’t convert it to dollars first.

This rule applies to every single transaction. Buying a laptop with Bitcoin? Taxable. Trading Dogecoin for Solana? Taxable. Receiving crypto as payment for freelance work? Also taxable. There’s no exception for small purchases, personal use, or everyday spending. The IRS doesn’t care if you’re just buying lunch - if you used crypto, you triggered a capital gain or loss.

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 it’s treated as business property, investment property, or personal property - and that changes your tax rate.

• Business property: If you mine Bitcoin as part of a business operation - say, running a server farm - the coins you earn are ordinary income. You pay your regular income tax rate on the fair market value of the Bitcoin when you receive it. Any future sale is then subject to capital gains.
• Investment property: This is the most common category. If you bought Bitcoin hoping it would go up in value, any profit from selling it is a capital gain. Hold it over a year? You get the lower long-term capital gains rate. Hold it less than a year? You pay your full income tax rate - up to 37%.
• Personal property: Even if you’re just using Bitcoin to pay for personal stuff, like a vacation or a car, the IRS still treats it as a sale. You must calculate your basis and report any gain. There’s no personal use exemption like there is for your car or home.

How to Calculate Your Gain or Loss

The math isn’t hard, but the record-keeping is brutal. Every Bitcoin you ever bought has a cost basis - what you paid for it, including fees. When you sell or spend some of it, you subtract that basis from what you got to find your gain or loss.

Here’s the catch: if you bought Bitcoin at different times and prices, you have to pick which units you’re selling. The IRS lets you use specific identification - meaning you can choose which exact coins to sell. But you have to prove it. That means keeping a detailed log of every purchase: date, price, amount, wallet address, transaction ID.

If you don’t have those records? The IRS forces you to use FIFO - first in, first out. That means the oldest coins you bought are the ones you’re considered to have sold. For example:

• April 15, 2023: Bought 1 BTC for $20,000
• June 15, 2023: Bought 1 BTC for $18,000
• January 10, 2026: Sold 1.5 BTC for $32,000

Under FIFO, you’re deemed to have sold the first 1 BTC ($20,000 basis) and half of the second ($9,000 basis). Total basis = $29,000. Gain = $32,000 - $29,000 = $3,000. That’s a taxable gain - even if you still own the other half of the second purchase.

Long-Term vs. Short-Term: The 1-Year Rule That Saves Thousands

Holding Bitcoin for more than a year can slash your tax bill. Long-term capital gains rates are much lower than ordinary income rates.

For 2025, here’s what you pay on long-term gains from Bitcoin:

• Single filers: 0% on gains up to $47,025; 15% up to $518,900; 20% above that.
• Married filing jointly: 0% up to $94,050; 15% up to $583,750; 20% above.
• Head of household: 0% up to $63,000; 15% up to $551,350; 20% above.

If you’re in the 32% income tax bracket and sell Bitcoin after holding it 11 months, you pay 32%. Wait one more month? You pay 15%. That’s a 17-point difference - and it’s all because of a calendar date.

Hard Forks, Airdrops, and Other Surprises

Crypto doesn’t always behave like traditional assets. When a blockchain hard forks - like Bitcoin Cash split from Bitcoin in 2017 - you might get new coins for free. The IRS says that’s income.

If you receive new cryptocurrency from a hard fork and an airdrop, you owe tax on its fair market value the moment you have control over it. That means when it shows up in your wallet and you can send it out. If you didn’t get any new coins? No tax.

Your basis in those airdropped coins? The amount you reported as income. So if you got 5 BCH worth $200 on the day of the airdrop, you report $200 as income, and your basis is $200. Later, if you sell those 5 BCH for $300, you pay capital gains on the $100 profit.

What Hasn’t Changed - Even After New Laws

You might think Congress would fix this mess. After all, the GENIUS Act passed in July 2025, and the CLARITY Bill made it through the House. But neither changed the core tax rule. The IRS still treats crypto as property. The SEC might call a token a security. The CFTC might say it’s a commodity. But for tax purposes? It’s property - and that’s all that matters.

The IRS has doubled down on enforcement. Since 2020, every Form 1040 asks: “At any time during 2025, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” Answer “no” incorrectly? You’re asking for an audit.

The Real Burden: Record-Keeping for Thousands of Transactions

If you’re an active trader, you might have hundreds of trades a year. Each one needs to be tracked: buy date, buy price, sell date, sell price, wallet addresses, transaction IDs. Missing one? You risk underreporting.

Most people use crypto tax software like Koinly, CoinTracker, or TokenTax to auto-import transactions from exchanges and wallets. These tools calculate your gains, generate Form 8949 and Schedule D, and flag errors. But the IRS doesn’t endorse any software. You’re still responsible for accuracy.

Tax professionals warn that manual tracking is nearly impossible for active users. Even a small mistake - like misreporting a swap as a gift - can trigger penalties. The IRS has already started auditing crypto users with high transaction volumes. If you’re trading regularly, don’t wing it.

What Happens If You Don’t Report?

The IRS isn’t bluffing. They’ve matched data from major exchanges like Coinbase, Binance US, and Kraken. They know who sent crypto to which wallets. They know when you cashed out. If your bank account suddenly deposits $100,000 from a crypto sale and you didn’t report it? You’re on their radar.

Penalties for underreporting can be steep: 20% accuracy-related penalty, 75% fraud penalty, or even criminal charges for willful evasion. The IRS has a dedicated cryptocurrency enforcement unit. They’re not waiting for you to come clean.

What You Should Do Right Now

If you’ve ever bought, sold, or used Bitcoin:

1. Collect all your transaction history from every exchange and wallet you’ve used.
2. Identify the purchase price and date for every coin you still hold.
3. Use crypto tax software to calculate your gains and losses for 2025.
4. Report every transaction - even small ones - on Form 8949 and Schedule D.
5. Keep your records for at least seven years. The IRS can audit crypto returns for that long.

Don’t wait for April. If you’re unsure, talk to a tax pro who specializes in crypto. This isn’t something you can guess your way through.

Is This Going to Change?

Maybe. But don’t count on it. The IRS has stuck with the property rule for over a decade. Even as other countries simplify crypto taxation - like Portugal eliminating capital gains or Germany allowing tax-free sales after one year - the US holds firm. The property framework is messy, but it’s consistent. It fits within existing tax law. Changing it would require Congress to rewrite major parts of the Internal Revenue Code.

Until then, Bitcoin remains property. Every transaction counts. Every gain matters. And every taxpayer is responsible for getting it right - no matter how inconvenient it is.