Bitcoin and Taxes: What's Important Now, What Could Matter Later, and Some Overlooked Planning Ideas
Quick intro: I'm Greg, a CPA based in New Jersey. I run Monaco CPA, where I focus on crypto tax.
I got into this by helping friends and family figure out their crypto situations. Then friends of friends. Then strangers on the internet. The questions kept getting harder, so I kept going deeper.
When I'm not buried in transaction histories, I'm usually losing golf balls or hunting for the best donuts in the US. Always open to recommendations.
This isn't advice for your specific situation-just how I think about Bitcoin and taxes. The basics, the long-term stuff, and some angles that don't come up much.
What Matters Now
Holding Bitcoin isn't taxable. But actually using it—spending it, swapping it for another crypto, or using it as collateral in DeFi—usually is. The IRS treats crypto as property, so any time you dispose of it, you're triggering a potential gain or loss.
If you receive BTC from mining, work, staking, or rewards, it's generally taxable when you have "dominion and control"—basically, when you can actually sell or transfer it. The value at that moment becomes your cost basis going forward. This comes from Rev. Rul. 2023-14.
Here's where it gets interesting: if your staking rewards are locked with a mandatory unbonding period, you might be able to argue that income recognition is deferred until the tokens are actually accessible. Fair warning though—the IRS hasn't issued specific guidance on this, so it's a defensible position but not settled law. Could be challenged.
On holding periods: under a year gets taxed as ordinary income (up to 37% federal). Over a year gets the long-term capital gains rates of 0%, 15%, or 20% depending on your income.
2026 Long-Term Capital Gains Brackets (from Rev. Proc. 2025-32):
| Rate |
Single |
Married Filing Jointly |
| 0% |
Up to $49,450 |
Up to $98,900 |
| 15% |
$49,451 – $545,500 |
$98,901 – $613,700 |
| 20% |
Over $545,500 |
Over $613,700 |
If you're a high earner, don't forget the 3.8% Net Investment Income Tax kicks in above $200K (single) or $250K (married). Those thresholds aren't indexed for inflation, by the way—they're set in stone under IRC 1411. So the effective top federal rate on investment income is really 23.8%.
The New Recordkeeping Situation
This is a big deal that not enough people are talking about.
As of January 1, 2025, the IRS killed "universal pooling" for cost basis. Under the final regs (T.D. 10000) and Rev. Proc. 2024-28, you now have to track basis per-wallet or per-account. You can't sell Bitcoin on Coinbase and use a purchase you made on Kraken to determine your basis anymore.
What happens if you transfer BTC to an exchange without providing your acquisition info? The broker might report your basis as "unknown" or just leave it blank. That puts 100% of the burden on you to prove what you actually paid. Some bigger custodians are starting to issue voluntary transfer statements, but most retail users aren't getting that.
Form 1099-DA timeline:
- 2025: Brokers report gross proceeds only (basis is optional)
- 2026 and beyond: Basis reporting becomes mandatory for "covered" assets (stuff acquired after 2025)
Bottom line: we've moved from "report what you want and hope for the best" to "prove your basis or potentially pay tax on the full amount."
The "basis orphan" problem. A lot of early Bitcoin holders bought on multiple exchanges, moved everything to cold storage, and kept terrible records. If you're in that boat, transferring those old coins to a new exchange without documentation could mean the exchange reports zero or unknown basis. That's a problem. If this is you, start consolidating and documenting now. Chain forensics, old CSVs, bank statements—whatever you can dig up will help.
Where Things Get More Interesting
Never selling—literally. Some people plan to hold their Bitcoin until they die. Sounds morbid, but there's real logic here.
When you die, your heirs get a stepped-up basis under IRC Section 1014. So if you bought BTC at $10K and it's worth $500K when you pass, your heirs inherit it at $500K. They can sell immediately and owe nothing.
| Scenario |
Original Basis |
Value at Death |
Sale Price |
Taxable Gain |
| You sell during life |
$10,000 |
— |
$500,000 |
$490,000 |
| Heirs sell after inheritance |
$10,000 |
$500,000 |
$500,000 |
$0 |
One thing to watch: Congress has proposed eliminating stepped-up basis multiple times. It hasn't passed, but the legislative risk is real.
Borrowing against it instead of selling. Some folks take out loans using their Bitcoin as collateral. You get cash, no taxable event—because borrowing isn't income.
But there are real risks:
- If BTC drops and you get liquidated, that's a taxable sale at the worst possible time
- Counterparty risk is real (ask anyone who used Celsius or BlockFi)
- Interest eats into your returns
Retirement accounts. This is one of the most powerful tools that people underuse.
You can hold Bitcoin inside a Roth IRA or Solo 401(k) through a self-directed custodian:
- Roth IRA: You pay tax on contributions, but growth and withdrawals are tax-free forever. Bitcoin 100x inside a Roth? Zero capital gains tax. Ever.
- Traditional IRA/401(k): Contributions might be deductible, growth is tax-deferred, withdrawals get taxed as ordinary income.
- Solo 401(k): If you're self-employed, the contribution limits are way higher.
- Brokerage windows: Some employer 401(k) plans let you access a brokerage window where you can buy Bitcoin ETFs inside the tax-advantaged wrapper.
2026 Contribution Limits (per IRS Notice 2025-67):
| Plan Type |
Standard Limit |
Catch-Up (50-59, 64+) |
Super Catch-Up (60-63) |
| 401(k) / Solo 401(k) |
$24,500 |
$8,000 |
$11,250 |
| Traditional / Roth IRA |
$7,500 |
$1,100 (now indexed) |
N/A |
| Total Solo 401(k) |
$72,000 |
$80,000 |
$83,250 |
SECURE 2.0 wrinkle: If your W-2 wages were over $145K last year (or $150K for 2026), your catch-up contributions have to go into a Roth. The transition period technically ended 12/31/2025, but final regs delay enforcement to 2027 for most plans.
Here's a different way to think about it: yes, you lose the immediate deduction. But if you believe Bitcoin is going to grow significantly, paying tax now for tax-free growth later might actually be the better deal.
QSBS (Qualified Small Business Stock). Some investors who've made big gains on Bitcoin redeploy into qualifying startups.
Under the OBBBA (for stock acquired after July 4, 2025):
| Feature |
Before |
After |
| Holding for 100% exclusion |
5+ years |
5+ years |
| Tiered exclusions |
None |
50% at 3 years, 75% at 4 years |
| Per-issuer cap |
$10M |
$15M (indexed after 2027) |
| Gross asset limit |
$50M |
$75M (indexed after 2027) |
Important: these new rules only apply to stock acquired after July 4, 2025. Old QSBS is still under the old rules.
The strategy some people use: sell Bitcoin, invest in qualifying QSBS, hold 3+ years, exit with 50%+ of gains excluded, then roll into new QSBS under Section 1045. It's a way to create compounding tax-free growth that's not available with direct Bitcoin holdings.
Opportunity Zones. If you have capital gains from selling Bitcoin, you can defer (and partially reduce) them by putting the proceeds into a Qualified Opportunity Zone Fund within 180 days. Hold for 10+ years and the appreciation on the OZ investment is tax-free.
Not simple though—you need an actual qualifying fund and a long time horizon.
State residency. Don't forget state taxes.
- No income tax on wages/investments: Texas, Florida, Wyoming, Nevada
- Washington: No wage tax, but they do have a capital gains excise tax now—7% up to $1M, 9.9% above that. So it's not "no tax" for Bitcoin gains.
- High tax states: California (13.3%), New York, New Jersey
Some people with big unrealized gains move to a no-tax state before selling. But you have to actually move—domicile matters, not just a mailing address. California and New York audit aggressively using "closer connection" tests.
Charitable giving. If you donate appreciated Bitcoin directly to a charity:
- You get a deduction for the full fair market value
- You pay zero capital gains tax on the appreciation
This works best with long-held BTC that's way up. Selling first and donating cash triggers the gain—don't do that.
Donor Advised Funds are useful here. Contribute the Bitcoin, get the deduction now, recommend grants to charities over time.
Charitable Lead Trusts are underused, especially in high-income years. The charity gets paid first for a set term, remainder goes to you or your heirs. If structured right, you get a big deduction now to offset a Bitcoin gain, then pay tax on trust income later. It's a tax-smoothing play.
Gifting. A few things to know:
- Annual exclusion: $19,000 per recipient (no gift tax return required)
- Lifetime exemption: $13.99M individual / $27.98M married for 2025; jumps to $15M / $30M in 2026 under OBBBA
- Recipient takes your cost basis
The OBBBA made the higher exemption permanent—no more sunset that would've dropped it back to ~$7M.
"Valuation trough" gifting: Bitcoin's volatility is actually useful here. Gift during a market dip and you "freeze" the value at a lower point, using less of your lifetime exemption. All the recovery happens outside your estate.
Puerto Rico (Act 60). This is the most aggressive move. Relocate to PR, become a bona fide resident, and new capital gains after your move can be taxed at 0%.
Requirements:
- Actually live there (183+ days/year)
- Buy real property within 2 years
- $10,000+ annual charitable donation (doubled from $5K under old Act 22)
The trap: there's a 10-year lookback rule under IRC 937(b). If you had built-in gains before you moved, selling within 10 years means those pre-move gains are still U.S.-sourced. Only gains that accrue after you establish residency get the 0% rate.
The IRS is not messing around here. They launched a task force in 2021, and they've already gotten criminal convictions. In U.S. v. Gajwani (June 2025), a guy pleaded guilty to backdating an S-corp election to hide $30M in gains. He got $15.3M in restitution and a year of probation.
Here's the thing: investors who want Puerto Rico to avoid taxes on frequent trading are usually the worst fit for the strategy. It works best for people who hold long-term and trade rarely. Unless you're willing to sit on your positions for a decade after moving, it probably doesn't help if you already have big gains.
The Wash Sale Situation
Current law as of December 2025:
- Spot Bitcoin: Classified as "property"—not subject to wash sale rules
- Bitcoin ETFs (IBIT, FBTC, BITO): Securities—subject to wash sale rules
This creates an opportunity. You can sell a Bitcoin ETF at a loss, immediately buy spot BTC, and keep your exposure. Since they're different legal categories, the "substantially identical" rule doesn't apply.
Caveats:
- The IRS hasn't specifically ruled on cross-asset "identicality"
- "Substantially identical" is a facts-and-circumstances test
- Treasury has proposed extending wash sales to crypto, but Congress hasn't acted
- This is a reasonable position but not bulletproof
Advanced version: hold both spot and ETFs. When you rebalance, harvest losses from whichever is down, then immediately buy the other to maintain exposure.
The Big Picture
Bitcoin tax strategy isn't about "avoiding taxes." It's about:
- Knowing when tax is triggered
- Deciding where your Bitcoin exposure lives (taxable vs. tax-advantaged accounts)
- Keeping your options open as laws change
What's different now:
| Category |
Old Way |
New Reality |
| Broker reporting |
Self-reported CSVs |
Mandatory 1099-DA |
| Cost basis |
Universal pooling |
Per-wallet only |
| Gift exclusion |
$18,000 (2024) |
$19,000 (2025/2026) |
| Solo 401(k) cap |
~$69,000 |
$72,000 (2026) |
| Catch-up rules |
All pre-tax OK |
High earners must use Roth |
| QSBS exclusion |
5-year minimum |
Tiered (50% at 3 years) |
| Wash sales |
Proposed for crypto |
No (spot) / Yes (ETFs) |
The new documentation requirements favor institutions. Custodial services will provide clean basis reporting. Individuals managing multiple wallets face serious reconciliation headaches. The regulatory direction is subtly pushing retail investors toward custodial solutions and away from self-custody.
The main risk now isn't under-reporting—it's documentation failure. If you can't prove your basis, you could pay tax on 100% of the proceeds.
The real edge isn't the trade. It's the structure you build around how you hold your assets.
Questions Worth Asking Yourself
- What's my actual time horizon with Bitcoin?
- Am I optimizing for now or for decades from now?
- Do I have retirement accounts I'm not using efficiently?
- What state do I live in, and does it matter for my situation?
- What would it look like if I never sold?
Happy to discuss any of this at a high level. Can't give specific advice in the comments, but I'm always down to talk through concepts.
And seriously—donut recommendations welcome.
