It finally happened; Bitcoin has hit the $100,000 mark. From its humble beginnings in 2009, when it was valued at zero, to this historic moment, the road has been filled with tons of volatility, breakthroughs and global adoption. This is great news for the wallets of those who own Bitcoin, but it may mean something different when it comes time to complete their tax return.
First things first, let’s talk about how Bitcoin is taxed in general. The IRS treats Bitcoin as property, which means its subject to capital gains when sold or traded. The sales transactions will be reported on Form 1099-B. If Bitcoin is held for longer than a year, the taxpayer will be subject to long-term capital gains.
If Bitcoin is held for less than a year before selling, then it will be taxed at a short-term capital gain rate, which can be as high as ordinary income tax rate. Now, you may have received emails or phone calls from clients who are considering selling Bitcoin now that has hit the $100,000 mark. What would you tell your clients when they asked about the tax consequences of selling Bitcoin right now, and how much in taxes would they have to pay?
If the client is ready to sell Bitcoin because it reached the mark of $100,000, beware that selling it will be a taxable event. Long-term capital gains are taxed at 0%, 15% or 20%, while short-term capital gains are taxed at regular income tax rate 10% to 37% in 2024 depending on taxpayer’s income.
Let’s take a look at an example. Your client Cooper bought Bitcoin for $5,000 back in 2015 and sold it for $100,000 in 2024. Cooper made a $95,000 profit. If Cooper held the Bitcoin for over a year, that profit will be taxed as long-term capital gains, which could be anywhere from 0% to 20% depending on Cooper’s income bracket. Now, let’s assume Cooper’s taxable income is $25,000.
Since Cooper’s taxable income is $25,000, you need to add the $95,000 Bitcoin profit, making Cooper’s total taxable income $120,000. This amount determines the capital gains tax rate Cooper will pay. The first $44,625 of Cooper’s income will be taxed at 0%, since it falls within the 0% bracket. The remaining income above $44,625 ($120,000 - $44,625 = $75,375) is taxed at 15%. Therefore, Cooper is taxed at 0% of his $44,625, and 15% for his $75,375. How much tax will he need to pay, based on these calculations?
Cooper will pay $11,306.25 ($75,375 x 15%).
Bitcoin’s rise to $100,000 is a game changer, but with great profits come great tax responsibilities. The popularity of Bitcoin now and in the future provides tax preparers with more opportunities to help existing and future clients make the best of their financial situations.
To learn more about reporting virtual currency and digital assets like Bitcoin, attend NATP’s on-demand webinar, Introduction to Digital Assets.
About National Association of Tax ProfessionalsThe National Association of Tax Professionals (NATP) is the largest association dedicated to equipping tax professionals with the resources, connections and education they need to provide the highest level of service to their clients. NATP is comprised of over 23,000 leading tax professionals who believe in a superior standard of ethics and exemplify professional excellence. Members rely on NATP to deliver professional connections, content expertise and advocacy that provides them with the support they need to best serve their clients. The organization welcomes all tax professionals in their quest to continually meet the needs of the public, no matter where they are in their careers.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing.