PARIS, FRANCE - JUNE 25: In this photo illustration, a visual representation of the digital ... [+]
As bitcoin (BTC
Cashing out BTC is a taxable event.
According to IRS Notice 2014-21, the IRS treats BTC as property. Therefore, selling BTC into cash results in a taxable event. For example, Sam paid $10,000 for 1 BTC a few years ago. He sold it for $50,000 in 2024. Sam has a taxable gain of $40,000 ($50,000 - $10,000).
Converting BTC into other coins is also a taxable event.
Most people often think that they have to pay taxes only if they receive cash in hand after a trade. Unfortunately, this is not the case.
For example, Sam paid $10,000 for 1 BTC a few years ago. When 1 BTC is trading at $50,000, Sam converts this into 25 Ethereum (ETH
There are two types of crypto gains: short-term and long-term. Short-term capital gains occur when you sell BTC (or any other coin) after holding it for less than 12 months. The tax rate could range from 10% to 37% depending on your annual tax bracket.
Long-term capital gains occur when you sell BTC (or any other coin) after holding it for more than 12 months. Long-term capital gains are subject to either 0%, 15% or a 20% tax rate depending on your overall taxable income.
Generally speaking, it's tax more advantageous to generate long-term capital gains because they are subject to lower tax rates than short-term.
Set aside taxes when you have crypto gains with no cash.
As explained above, crypto-to-crypto trades trigger capital gain taxes. Since you don’t receive any cash from the trade, it’s very important to set aside cash to cover the tax bill.
Continuing with our example above, Sam made $40,000 of capital gains when he traded 1 BTC into 25 ETH. He is responsible for paying taxes on this gain in USD. A good rule of thumb is to set aside 20% to cover the tax bill. In this case, he Sam can set aside $8,000 ($40,000 * 20%) in cash to cover the related tax liability.
Use Highest-in-First-out accounting (HIFO) accounting method.
HIFO accounting method can significantly minimize your capital gains by selling the highest cost basis BTC first. You are allowed to use this method if you keep meticulous records as described on Q40 by the IRS. Manually managing these records across multiple coins and wallets is a cumbersome task. You can use a reputed crypto tax software tool to manage these records and calculate capital gains under the tax advantageous HIFO accounting method.
Large gains can trigger federal and state quarterly tax payment obligations.
The US has a pay-as-you-go tax system. In simple terms, you have to pay taxes as you make money as opposed to at the end of the year. This is why you withhold taxes from each paycheck and remit to the IRS and state governments.
If you make large crypto gains, you might have to remit additional taxes to the IRS and to your state government each quarter. If not, you may be liable certain penalties when you file your tax return at the end of the year. You may be liable for these “estimated tax payments” if you expect to owe tax of $1,000 or more when you file the return.
