Crypto as Property: US Tax Treatment for Bitcoin

Crypto as property isn’t just a legal technicality-it’s the foundation of how every Bitcoin transaction in the U.S. is taxed. Whether you bought Bitcoin in 2020, mined it last year, or used it to pay for coffee last week, the IRS treats it like stocks or real estate, not cash. That means every time you sell, trade, or spend Bitcoin, you might owe taxes. And if you don’t track it, you’re at risk.

Why Bitcoin Isn’t Treated Like Money

The IRS made this clear back in 2014 with Notice 2014-21: Bitcoin and other cryptocurrencies are property, not currency. That decision still holds in 2026, even after new laws like the GENIUS Act and the CLARITY Bill passed. Those laws changed how crypto is regulated, but they didn’t touch tax rules. The IRS didn’t budge.

Think of it this way: if you buy a painting for $5,000 and sell it for $12,000, you pay capital gains tax on the $7,000 profit. Bitcoin works the same. Buying 0.5 BTC for $20,000 and selling it later for $35,000? You’ve got a $15,000 gain. No matter how you use it-buying a car, trading for Ethereum, or paying rent-the IRS sees it as a sale of property.

Three Ways Bitcoin Is Classified (And How It Changes Your Tax Bill)

Not all Bitcoin is taxed the same. The IRS looks at how you got it and what you do with it. There are three main categories:

• Business property: If you mine Bitcoin as part of your business, the coins you earn count as ordinary income. You pay regular income tax rates-up to 37%-on the fair market value of the Bitcoin when you receive it. You can deduct mining expenses, like hardware and electricity, but you still owe tax on the value at receipt.
• Investment property: This covers most people who buy Bitcoin hoping it goes up. If you hold it more than a year before selling, you get long-term capital gains rates: 0%, 15%, or 20%, depending on your income. Single filers pay 0% if their taxable income is under $47,025. Married couples filing jointly get that 0% rate up to $94,050. Above those thresholds, rates climb.
• Personal property: This is tricky. If you use Bitcoin to buy groceries, clothes, or a laptop, the IRS still treats it as a sale. You have to calculate the gain based on what you originally paid for that Bitcoin. Even a $50 coffee purchase can trigger a taxable event if the Bitcoin you spent went up in value since you bought it.

That last one catches people off guard. You might think spending crypto is like spending cash. It’s not. You’re selling an asset. And you owe tax on the difference between what you paid and what it was worth when you spent it.

How to Calculate Your Gain or Loss

You can’t just look at your wallet balance and guess. You need to track every purchase. The IRS allows two methods:

1. Specific identification: You pick which Bitcoin units you’re selling. For example, if you bought 1 BTC in January for $25,000 and another 1 BTC in June for $30,000, you can choose to sell the cheaper one to minimize your tax. But you must keep detailed records-transaction IDs, dates, prices, and wallet addresses.
2. FIFO (first-in, first-out): If you don’t track specific lots, the IRS assumes you sold the oldest coins first. This is the default method. So if you bought Bitcoin in 2020 at $5,000 and sold some in 2025 at $60,000, you’re taxed on $55,000 in gains-even if you bought newer coins at $55,000. FIFO can create big tax bills if prices rose over time.

Here’s a real example: You bought 1 BTC on March 10, 2023, for $40,000. You bought another 1 BTC on August 15, 2024, for $55,000. In January 2026, you sell 1.2 BTC for $70,000. If you use FIFO, the IRS assumes you sold the 2023 BTC and 0.2 BTC from the 2024 purchase. Your basis is $40,000 + (0.2 × $55,000) = $51,000. Your gain is $70,000 − $51,000 = $19,000. If you had used specific identification and sold the 2024 BTC first, your gain would be $70,000 − $55,000 = $15,000. The difference? $4,000 in taxes saved.

Hard Forks and Airdrops: When You Get Free Crypto

Sometimes, a blockchain splits. Bitcoin Cash was born this way. If you held Bitcoin at the time of the fork and received new coins, the IRS says that’s taxable income.

Here’s how it works:

• If you didn’t get new coins? No tax.
• If you received new coins via an airdrop? You owe ordinary income tax on the fair market value when you got them. Say you received 5 BCH worth $300 on the day it hit your wallet. You report $300 as income. Your basis in those BCH is also $300. Later, if you sell them for $500, you pay capital gains on $200.

Timing matters. The IRS says you have “dominion and control” when you can move the coins. If they’re stuck in a wallet you can’t access, no tax until you can. But once you can send them? That’s the day you owe tax.

What You Must Track (And What Happens If You Don’t)

The IRS doesn’t just want your total gain. They want a paper trail for every transaction. That includes:

• Buy date and price (in USD)
• Sell date and price
• Trade from one crypto to another (e.g., BTC to ETH)
• Using crypto to pay for goods or services
• Receiving crypto as payment for work
• Mining rewards
• Airdrops and forks

Most people use software like Koinly, CoinTracker, or TokenTax to auto-import transactions from exchanges and wallets. The IRS doesn’t endorse any tool-but they do expect accurate records. If you’re audited and can’t prove your basis, the IRS can assume a $0 cost basis. That means every dollar you sold is taxable income. A $100,000 crypto sale could become $100,000 in ordinary income. That’s a $37,000 tax bill before penalties.

Why the IRS Keeps This System (And Why It’s Not Changing)

Some lawmakers have pushed to treat crypto like cash-exempting small transactions under $600, for example. The CLARITY Bill tried that. But the IRS says property rules are clear, consistent, and already embedded in decades of tax law. Changing it would require rewriting the whole framework.

And they’re enforcing it. Since 2020, Form 1040 has asked: “At any time during 2025, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” Answering “no” when you had transactions can trigger an audit. The IRS has matched data from Coinbase, Kraken, and Binance to find unreported activity. Thousands of audits have already happened. The IRS doesn’t need to change the rules-they just need to catch people who ignore them.

What You Should Do Now

Don’t wait for April 15. Start now:

• Export your transaction history from every exchange and wallet you’ve used since 2013.
• Use crypto tax software to auto-calculate gains and losses. Pick one and stick with it.
• If you mined or got crypto as payment, record the fair market value on the day you received it.
• If you trade crypto for crypto, treat each trade as two separate sales: BTC to USD, then USD to ETH. Both legs are taxable.
• Keep records for at least seven years. The IRS can audit crypto transactions going back that far.

The bottom line: Crypto as property means every transaction has tax consequences. There’s no such thing as a tax-free crypto spend. The rules aren’t going away. The only way to avoid surprises is to track everything-and do it right.