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Bitcoin at $100,000.

Can you believe it?

Investors are clearly feeling optimistic about the incoming Trump administration and its promise of deregulation, particularly in the crypto space. With key regulatory appointees signaling a more hands-off approach, Bitcoin has seen dramatic gains, skyrocketing more than 44% in the month following Election Day.

If you own Bitcoin, your portfolio is probably looking pretty impressive right now. (It was easily the best performer in the boys' portfolio this year.) But before you start pumping your fist, remember who else is taking notice...

The IRS.

That's right. With great gains come great responsibilities — especially when it comes to taxes.

Unfortunately, when it comes to crypto, the rules aren't exactly simple.

What do you owe? How do you report it? What counts as income versus a capital gain? Wait... it's not all taxed as capital gains??

Don't worry — we're breaking it all down. This isn't some dry, boring tax talk. Think of this as the chat you'd have with a friend over coffee... except that coffee might cost you a few Satoshis, and yes, that transaction could be taxable.

Ready? Let's dive into the tax world of Bitcoin — because while hitting $100,000 feels like a dream, messing up your taxes can turn it into a nightmare.

The IRS Has Its Eyes on Crypto

Let's clear up a common misconception right off the bat.

If you're sitting there wondering, "Does the IRS really know about my crypto?"

...the answer is a resounding yes. Yes, they do.

In fact, the IRS has made it clear they're keeping a close eye on digital assets, and they've got the tools to back it up.

All major crypto exchanges follow KYC (Know Your Customer) regulations. This means they collect key details like your name, address, and banking information when you trade or purchase crypto. When you buy Bitcoin with dollars, for example, that transaction is tied to your bank account.

But it doesn't stop there. Exchanges also track where your crypto goes. If you withdraw to a custodial wallet, those addresses are logged too — and they're traceable.

The IRS is already using this data. They've successfully required major exchanges like Coinbase, Kraken, and Poloniex to share customer information. These efforts have given the agency unprecedented insight into crypto transactions.

And to take things even further, the IRS recently brought in private sector crypto specialists for the 2024 tax season. With funding from the Inflation Reduction Act, they're making sure unreported crypto activity is harder to overlook.

So, if you're wondering whether the IRS knows about your trades, mining rewards, or airdrops, the answer is pretty clear: They do.

The takeaway? The IRS isn't messing around when it comes to crypto taxes. Neither should you.

When Does Crypto Get Taxed?

With Bitcoin's historic rise, the IRS is paying more attention than ever. Understanding how and when your crypto is taxed isn't just important — it's essential to protect those impressive gains. So let's talk taxes.

If you made money from Bitcoin in 2024, the IRS wants a piece. But it's not as simple as filling out a single form and calling it a day. How you're taxed depends entirely on how you made that money. Was it from selling, trading, spending, or earning? Each comes with its own set of rules, so let's break it down.

1) When You Profit from Selling, Trading, or Spending → Capital Gains Tax

Let's talk about taxable events, which are triggered every time you sell, trade, or spend your Bitcoin. The IRS considers any disposal of your crypto — whether it's cashing out, swapping it for another cryptocurrency, or even using it to buy your morning coffee — a potential taxable moment.

The key question is: Did you make a profit? If the value of your Bitcoin increased since you bought it, that profit is called a capital gain, and it's subject to tax.

Here's how it works. Say you bought 1 Bitcoin for $50,000 and later sold it for $100,000. That $50,000 difference is your gain, and you'll owe taxes on it. If you held the Bitcoin for less than a year before selling, you'll be taxed at your regular income tax rate (short-term gain). But if you held it for a year or longer, you'll get a lower tax rate based on your income bracket (long-term gain).

But what happens if you spend Bitcoin instead of selling it? Let's break it down.

Imagine Bitcoin is worth $100,000, and you use a tiny fraction — say, 0.00005 Bitcoin — to buy a $5 latte. Even though this feels like a simple purchase, the IRS sees it as a sale of 0.00005 Bitcoin. To figure out if you owe taxes, you'll compare the value of the Bitcoin when you bought it (your cost basis) to its value when you used it for the latte.

If you bought that Bitcoin when it was $50,000, the cost basis for the 0.00005 Bitcoin you spent would be $2.50. Since the Bitcoin is now worth $100,000, the $5 you spent represents a $2.50 gain ($5 current value minus $2.50 cost basis). That $2.50 is taxable.

The good news? You're only taxed on the gain from the specific amount of Bitcoin used for the transaction — not the entire value of your Bitcoin holdings.

Understanding these rules is crucial because even small purchases can add up over time, especially if you've been actively using Bitcoin for everyday spending. Every transaction, no matter how minor, requires you to calculate your gain or loss. This is why meticulous record-keeping isn't just a suggestion — it's a necessity.

So, whether you're trading Bitcoin for Ethereum, cashing out at its $100,000 peak, or grabbing a latte, remember: If there's a profit, the IRS expects a cut.

2) When You Earn Bitcoin → Income Tax

Not all Bitcoin gains come from trading or selling. Sometimes, Bitcoin just appears in your wallet — like magic. But in the IRS's eyes, this magic is taxable income.

If you've earned Bitcoin through mining rewards, staking payouts, payment for goods or services, or even airdrops, it's treated as income. This means you'll owe income tax based on the value of the Bitcoin at the time you received it. Unlike capital gains, which are tied to the profit you make when selling, income tax is applied to the full value of the Bitcoin when it enters your wallet.

Let's break it down with an example:

Imagine you're mining Bitcoin. On a sunny Tuesday, you successfully mine 0.01 Bitcoin. At the time you receive it, Bitcoin is worth $100,000 per coin. That means your reward is valued at $1,000 (0.01 × $100,000).

The IRS sees that $1,000 as income, just like a paycheck from a traditional job. The tax rate you'll pay depends on your total income for the year. For 2024, federal income tax rates range from 10% to 37%. So, if your annual income puts you in the 22% tax bracket, you'd owe $220 in federal taxes on that $1,000 of mined Bitcoin. And don't forget — state taxes might apply too, depending on where you live.

Now, let's say instead of mining, you earned Bitcoin through staking rewards. Maybe your rewards are paid out weekly, and every payout is a little different because Bitcoin's price fluctuates. The IRS still requires you to report each reward based on its fair market value on the day you received it.

Airdrops follow the same logic. If a cryptocurrency company decides to gift you 0.005 Bitcoin as part of a promotional airdrop, and Bitcoin is valued at $100,000 that day, that $500 gift isn't free in the eyes of the IRS — it's income.

Here's the kicker: Income tax can be heftier than capital gains tax, depending on your earnings. Unlike long-term capital gains, which often have lower tax rates, income tax can climb quickly if you're in a higher bracket.

That's why it's so important to track the value of Bitcoin on the day you receive it, whether it's mined, staked, or dropped into your wallet. Keeping accurate records ensures you're prepared to report everything correctly and avoid surprises when tax season rolls around.

Figuring out how Bitcoin is taxed — whether it's gains from selling or income from mining — is half the battle. The next step? Making sure you report it the right way. Let's dive into how to get it all down on your tax return without breaking a sweat.

How to Report Your Crypto Like a Pro

So, you've figured out if you owe taxes on your Bitcoin. Now comes the fun part — reporting it. The IRS wants every detail, and getting it right can feel overwhelming. But with a little preparation, you can handle it without breaking a sweat.

1) Reporting Gains and Losses (i.e., Capital Gains).You'll use Form 8949 to list every single taxable crypto transaction you made last year. Yep, every one. Bought low, sold high? It goes here. Spent Bitcoin on sushi? It goes here. Traded Bitcoin for Ethereum? You guessed it. It goes here.

You'll need to provide the date acquired and date sold or traded, proceeds (how much you made from the transaction), and cost basis (what you originally paid for the Bitcoin).

All of this gets summarized on Schedule D, where you calculate your total gains and losses. And hey, if you lost money on a trade (it happens), you can use that to offset your gains and even reduce your taxable income. Silver lining, right?

2) Reporting Crypto Income (i.e., Mining Rewards, Staking Payouts, Payments, Airdrops). Now, let's talk about that sweet, sweet Bitcoin you earned. Whether you received mining or staking rewards, airdrops, or someone simply paid you with Bitcoin, it counts as income.

So, how do you report it? For one-off or occasional income (think airdrop events), you'll report it on Schedule 1. But if mining Bitcoin is basically your side gig and you receive regular, self-employment-style earnings, Schedule C is your form.

Side note:If you're making a significant amount of income from Bitcoin (or other crypto, for that matter), you should consult a crypto tax attorney.

Ride the Bitcoin High — Responsibly

Bitcoin at $100,000. It's the stuff of dreams, right?

If you picked up some Bitcoin at any point over the past few years, things are probably looking pretty good. And remember: Staying compliant now means you can enjoy those gains stress-free later.

So, let's toast to Bitcoin's record-breaking run — and to your rock-solid tax game.

Curious about common crypto tax mistakes and how to avoid them? Stay tuned — we'll dive into the missteps to watch out for and tips to make tax season a breeze.

Here's to a successful tax season — and to keeping more of what you earn.