What Happens If You Sell Bitcoin: Rates, Cost Basis, and Reporting

When you sell Bitcoin at a profit, the IRS taxes that profit as a capital gain. The federal tax on selling Bitcoin runs from 0% to 23.8%, depending on how long you owned the coins and your total income for the year.¹ You report each sale on Form 8949, carry the totals to Schedule D, and answer “Yes” to the digital asset question on Form 1040. If you held the Bitcoin more than a year, you get preferential long-term rates. If not, the gain is taxed like salary.

What Actually Counts as a Sale

The tax hits any disposition, not just cashing out to dollars. The IRS treats all of the following as taxable events: selling Bitcoin for U.S. dollars or another fiat currency, trading Bitcoin for a different cryptocurrency, and using Bitcoin to pay for goods or services in any amount.¹

Swapping Bitcoin for Ethereum feels like moving money between accounts, but the IRS sees it as selling one property and buying another. Same story for buying a cup of coffee with Bitcoin: the gain between what you paid for the coins and the dollar price of the coffee is taxable. Section 1031 like-kind exchange treatment has been limited to real property since 2018, so crypto-to-crypto trades cannot shelter the gain.¹

How Much Tax You Will Owe

Every sale produces either a capital gain (sale price above your cost basis) or a capital loss (sale price below basis). The holding period decides which rate applies. One year or less is short-term. More than one year is long-term. The IRS counts from the day after you acquired the Bitcoin through the day you disposed of it.²

Short-Term Gains

Short-term gains are taxed at your ordinary income rate. They stack on top of your wages and other income and run through the regular federal brackets. For 2026, the top marginal rate is 37%, which starts at taxable income above $640,601 for single filers and $768,701 for joint filers.³ A large short-term gain can push you into a higher bracket for that year.

Long-Term Gains

Hold Bitcoin more than a year and the federal rate drops to 0%, 15%, or 20% depending on your total taxable income and filing status. For 2026:

0% applies to taxable income up to $49,450 (single), $98,900 (married filing jointly), or $66,200 (head of household).
15% applies above those thresholds up to $545,500 (single), $613,700 (joint), or $579,600 (head of household).
20% applies above the 15% thresholds.³

Those brackets are measured against total taxable income, not the gain alone. A large sale can lift income that would otherwise sit in the 0% band up into 15% or 20%.

The 3.8% Surtax

High earners face an extra 3.8% net investment income tax on capital gains, including Bitcoin. It applies when modified adjusted gross income exceeds $200,000 (single), $250,000 (joint), or $125,000 (married filing separately), and it is reported on Form 8960.⁴ Stacked on the 20% long-term rate, that produces the 23.8% effective ceiling.

Figuring Your Cost Basis

Your basis is what you paid to acquire the Bitcoin, including any purchase-side fees. Selling fees reduce your proceeds. If you received Bitcoin as payment for work, your basis is the fair market value in dollars on the day you received it, which was also reported as ordinary income that year.⁵ Inherited Bitcoin gets stepped-up basis equal to its fair market value on the decedent’s date of death, so appreciation during the original owner’s lifetime is not taxed to the heir.

If you bought Bitcoin in several batches at different prices, you need a method for deciding which coins you sold. Two options are allowed. You can specifically identify units by documenting the acquisition date and time, the price paid, and a unique identifier such as a transaction ID or wallet address, so long as you designate at or before the time of sale.⁶ Otherwise the IRS defaults to first-in, first-out (FIFO), treating your earliest coins as sold first.⁵ Specific identification often lowers your gain because you can pick higher-basis lots to sell. For sales through a broker after December 31, 2025, you must communicate your identification method to the broker at or before the transaction.

When You Sell at a Loss

A Bitcoin loss offsets capital gains from any other property dollar for dollar. If losses exceed gains for the year, you can deduct up to $3,000 of the excess against ordinary income, or $1,500 if married filing separately.⁷ Anything above that carries forward indefinitely to future years.²

The wash sale rule that blocks stock investors from claiming a loss when they rebuy within 30 days is written for “stock or securities” under IRC Section 1091. Because the IRS classifies cryptocurrency as property, the rule does not currently apply to Bitcoin. Congress has repeatedly proposed extending it to digital assets, but as of 2026 no such proposal has been enacted. That could change, so track pending tax legislation if loss harvesting is part of your plan.

How to Report the Sale

The Digital Asset Question on Form 1040

Every individual return carries a mandatory yes-or-no question near the top asking whether you received, sold, exchanged, or otherwise disposed of a digital asset during the year.⁸ If you sold any Bitcoin, check “Yes.” The IRS uses this as a compliance flag.

Form 8949 and Schedule D

Each sale gets its own line on Form 8949, with a description of the asset, the acquisition date, the sale date, the proceeds, your cost basis, and the resulting gain or loss.⁹ Totals from Form 8949 flow to Schedule D, which nets your gains and losses for the year. Both go with your return by April 15.¹⁰ If you had dozens or hundreds of trades, crypto tax software can generate Form 8949 from your exchange history.

Quarterly Estimated Payments

A big gain mid-year can create an underpayment penalty if you wait until April to settle up. Quarterly estimated payments are generally required if you expect to owe at least $1,000 after withholding and refundable credits, and your withholding will not cover 90% of this year’s tax or 100% of last year’s (110% if your prior-year AGI exceeded $150,000).¹¹ For a one-off large sale, you can annualize income using the worksheet in Publication 505 and file Form 2210 with Schedule AI to match the payment to the quarter the gain occurred.

What Your Exchange Sends the IRS

Starting with 2025 transactions, cryptocurrency brokers and exchanges report sales to both you and the IRS on the new Form 1099-DA.¹² Brokers had to send 2025 forms to customers by February 17, 2026.¹³ For this first year most 1099-DA forms show gross proceeds only, not cost basis, so you still have to compute basis from your own records.

Some platforms may separately issue Form 1099-K if payments through a third-party settlement organization exceeded $20,000 across more than 200 transactions.¹⁴ The 1099-K reports gross payment volume, not gains, so its numbers will not match your taxable income. Reconcile every form you receive against your own transaction log before filing.

Not getting a form does not erase the obligation. Peer-to-peer trades and decentralized exchange activity still owe the same tax. Blockchain transactions are public, and the IRS uses analytics tools to trace on-chain activity.

Records You Need to Keep

For each transaction, keep the acquisition date and time, dollars paid including fees, sale date and time, fair market value at sale, and proceeds received. Export your exchange history regularly and store it separately: platforms shut down, get hacked, or change data retention. For Bitcoin held in self-custody, this is on you alone. If you cannot prove your basis, the IRS may treat it as zero, making the entire sale price taxable as gain.⁶

Penalties for Skipping It

At minimum, unpaid tax after April 15 accrues interest and late-payment penalties.¹⁰ An accuracy-related penalty of 20% of the underpayment can apply if the IRS finds the return was negligent or substantially understated income. Willful tax evasion is a felony carrying up to five years in prison and fines up to $100,000 for individuals.¹⁵ Criminal cases are rare and reserved for deliberate fraud, but with 1099-DA reporting now live, the gap between what the IRS sees and what taxpayers report is much easier for the agency to close.

State Tax Is Separate

Federal tax is only one layer. Most states tax capital gains as ordinary income, with rates ranging from 0% in no-income-tax states to over 13% in the highest. A few states exempt some or all long-term capital gains. Check your state’s department of revenue for the rate and any special treatment before you finalize the plan for a large sale.

1
Internal Revenue Service. Digital Assets
2
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
3
Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates
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Internal Revenue Service. Net Investment Income Tax
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Internal Revenue Service. Frequently Asked Questions on Virtual Currency Transactions
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Internal Revenue Service. Frequently Asked Questions on Digital Asset Transactions
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Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses
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Internal Revenue Service. Determine How to Answer the Digital Asset Question
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Internal Revenue Service. Instructions for Form 8949
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Internal Revenue Service. Topic No. 301, When, How and Where to File
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Internal Revenue Service. Large Gains, Lump Sum Distributions, Etc.
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Internal Revenue Service. About Form 1099-DA, Digital Asset Proceeds From Broker Transactions
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Internal Revenue Service. Reminders for Taxpayers About Digital Assets
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Internal Revenue Service. Understanding Your Form 1099-K
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Office of the Law Revision Counsel. 26 USC 7201 – Attempt to Evade or Defeat Tax