Bitcoin Gains - Tax Advice For US Taxpayers

As Bitcoin has reached five figure levels this week, I have received a number of questions about taxes owed on Bitcoin gains.

That is comforting to me. Bitcoin and crypto are a bit like religion. There are a lot of true believers out there, me included.

But at least some people are stepping back and taking money off the table. I would encourage everyone to think about at least taking their cost off the table and playing with the house money at these levels.

And if bitcoin/crypto has reached an unhealthy percentage of your net worth, I would also recommend stepping back and thinking about rebalancing your asset allocation.

So, if you are US taxpayer, what do you owe in taxes on these gains?

The IRS issued this guidance back in the spring of 2014:

IR-2014-36, March. 25, 2014

WASHINGTON — The Internal Revenue Service today issued a notice providing answers to frequently asked questions (FAQs) on virtual currency, such as bitcoin. These FAQs provide basic information on the U.S. federal tax implications of transactions in, or transactions that use, virtual currency.

In some environments, virtual currency operates like “real” currency — i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance — but it does not have legal tender status in any jurisdiction.

The notice provides that virtual currency is treated as property for U.S. federal tax purposes.  General tax principles that apply to property transactions apply to transactions using virtual currency.  Among other things, this means that:

  • Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
  • Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply.  Normally, payers must issue Form 1099.
  • The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
  • A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. 

Further details, including a set of 16 questions and answers, are in Notice 2014-21, posted today on

I would strongly suggest folks read that link to “Notice 2014-21” as it includes a lot more information in it.

I have always thought about Bitcoin and other crypto assets like stocks when it comes to capital gains. When you sell the coins, you owe capital gains taxes on the gains.

But how do you calculate the gains?

  • Do you need to identify the exact coins you sold and go back to determine how much you paid for them and then calculate the gain on those coins and the taxes owed? That is like identifying a “lot” when you sell stock.
  • Do you use “first in, first out” (FIFO) to determine which coins were sold and the gains and taxes owed?
  • Do you use the average cost of your entire position and then determine the gains and taxes owed?
  • And if you held the coins for longer than twelve months, do you benefit from capital gains rates vs ordinary income rates?

I assume the answer to the last question is yes and that you can use whichever of the three methods to calculate gains but you need to use them consistently and that requires you to track your buys and sells very carefully.

But I am most certainly not a tax advisor and I do not give tax advice here at AVC. We have very good tax advisors who will figure this stuff out for us.

Hopefully, there are some tax advisors in the AVC audience who will weigh in with answers (and likely more issues to be considered). So if you are an expert in this stuff, please take the time to leave all of some answers in the comments this morning. We appreciate it.


Comments (Archived):

  1. Michael B. Aronson

    Can they be donated to a charitable trust, taking the market value for the donation as we do with stock

    1. fredwilson

      yes, i just got an email from someone suggesting that i blog about that. i might do it.

      1. JeffWaldman

        If you do, may I suggest plugging an EFF (or similar, though I don’t know a good one personally) donation. There’s a certain harmony to funneling crypto profits into a champion of the free internet.

      2. mkyle

        @fredwilson:disqus Fidelity charitable—a 501(c)3—accepts BTC donations, and then allows you to designate any other 501(c)3 that you would like to donate to.

      3. Emad Mostaque

        I think you’ll see a lot more charities doing token-based fundraisers to offer this option.Ours at is using hyper-relational databases & AI to map global ideologies – knowledge graphs of belief to fight hate.As a UK registered charity with a US based counterparty we can accept contributions from US & UK tax payers during our fundraiser until year end and issues tokens in recognition of this, giving contributors tax relief while they support a good cause.The tokens being allocated can be used to sponsor various parts of the platfrom, from chapters of scripture to clauses of the constitution, helping direct resources to mapping their interpreations. Also used as a form of fixed membership for the data platform area, so as more communities join to map ideologies, demand goes up and cost of membership goes up, which feeds back into increased demand as an effective veblen good.Parts of this model should be generalisable to other charities, giving them a large advantage in this space over private companies that have tokens mess up their accounting & owe corporation taxes on them.

  2. Eric Satz

    If you use IRA savings the same way you would to buy a precious metal you skip the tax part altogether!

    1. pointsnfigures

      Yup, but you pay the tax when you take it out at ordinary income.

      1. Eric Satz

        at your ordinary income rate when you take it out, not when you put it in. so, post-retirement, likely your lowest ordinary income rate and you get the benefit of time between now and then. finally, no tax if you do it in your ROTH, period.

  3. jason wright

    but what is driving this sudden surge in the price of bitcoin?n.b. $11,105 on CMC at 12:24 GMT.

    1. Crosshairs

      I’m thinking it is the unbridled Mick mulvaney, an btc advocate, knows that it is hands off and clear sailing.

      1. JamesHRH

        What intel do you have that says Mulvaney is pro-crypto?Curious, not accusatory.

  4. pointsnfigures

    Bitcoin got a break that the IRS didn’t say it was a commodity. Commodity trades are marked to market and you owe tax whether you have closed the trade or not. This means if you are trading CME Bitcoin futures and have a gain on December 31, you owe tax on that gain. It’s a blended rate, 60% top rate, 40% cap gains. Futures start trading Dec 11.

    1. Salt Shaker

      It is a bit odd that the IRS did not specify that the sale or liquidation of btc is a currency transaction and taxed as ordinary income (not cap gains) like other currency trades. It certainly is treated as ord income if/when wages are reported on a (W-2). By not specifying, it seems the IRS is leaving money on the table, a bit ironic since Congress is in the midst of tax reform, with deficit spending always a concern.

      1. JLM

        .This comes straight from the US SEC.As “property”, they can regulate it like a stock with the holding period determining its character as either “ordinary” (technically, short term capital gain) or “long term capital gain”.Once it is taxed like a stock, the SEC will use that fact as a basis for imposing similar regulatory oversight.JLMwww.themusingsofthebigredca…

    2. JamesHRH

      That is an amazing, and in my mind, curious decision.Are they treating it as currency?

    3. Girish Mehta

      Nasdaq is planning to launch bitcoin futures as well in early 2018. Wonder if, like the CME, Nasdaq will also settle Bitcoin futures in…..dollars. :-).

      1. ShanaC

        That may change rulings

  5. WA

    I am hearing a FIFO approach from some tax pros in my network, as well, in the calculation. This is not tax advice. And ordinary income approach from some.

    1. fredwilson

      🙂 neither is my post

  6. jason wright

    on an unrelated topic, how the hell do people manage to get along with oversized phablet phones? they’re so awkward to hold comfortably and securely. the top of my Pixel keeps wanting to pivot out over the end of my fingers and crash to the floor. I can understand how people break them. too wide and too long. Andy Rubin is going in the right direction with the PH-1.

    1. Susan Rubinsky

      Loved my Note and my Note4. Once dropped the Note 4 (not in a case, just the naked phone) down a stairwell in a parking garage. When I got to the bottom, I picked it up off the concrete and dusted it off — no cracks, no scratches — and moved on. I also dropped it into Long Island Sound accidentally and just picked it up from the sandy bottom and it still worked fine.I love this size for a lot of reasons. I once recoded a website that was down from my original Note while traveling on Metro North. I would have preferred a laptop or desktop but I did what I needed to do. The screen is big enough so that you can see enough code to get the job done.Great for reading news articles too.

      1. jason wright

        Thanks Susan. I am contemplating the Note 8 and the S8 series, but they’re still on Android 7 until next years and not Project Treble compatible, which is a little bit disappointing. They do have dual sim variants though, which is an attractive feature.did you dive in?

        1. Susan Rubinsky

          Unfortunately, my Note4 battery died a week before the release of Note8. Was thinking about ordering a new battery, but just went for the S7 instead. I’m going to give the S7 to my Mom and get Pixel (I think).

  7. jason wright

    this post does raise one question in my mind. do you not see any other crypto project that presents a better alternative to cashing out to a tax liability?

    1. fredwilson

      ETH, been rotating out of BTC into ETH for the past couple years. I really like the roadmap that Vitalik has been showcasing in recent weeks. there is more risk with ETH but i think there is more reward too

      1. jason wright

        ETH, yes, my enormous crypto ‘tuition fee’ 🙂

      2. Kenneth Younger III

        I’ve been considering doing this, but wasn’t sure if cap gains payments were triggered by selling BTC for ETH. From what I can tell, yes.

        1. Cody

          Unfortunately, trading BTC for ETH is not a like-kind transaction. It doesn’t make much sense to me. If I’m not moving from BTC –> Fiat –> ETH, and going directly from BTC –> ETH, why does that trigger a taxable event?

  8. Tom Labus

    Take some cash at this point. This is way uncharted territory.

    1. onowahoo

      That’s what I did at $50. I told myself when i rebought between $200 and $1000 I was planning on holding forever, or at least ten years. This recent run is so accelerated that I feel bad not taking some money off the table but I probably won’t.Also, how does it work with all my BTC-E trades that I didn’t record?

      1. JamesHRH

        When was acquired by AOL, I had a nice win.When we talked about taking money off the table, post lockup, my response was ‘ Its not like AOL is a plumbing company, like Nortel or Lucent. It has tons of room to grow in content and distribution.’In the next 8 months, AOL went from $58 to $8.Don’t take the lumps personally, borrow some lumps from people who have been there.BTC can go from $10,000 to $1000 to $100 in a day. Even Fred says there will be a major pullback. Are you in a position to buy in when it is $100 (mentally and economically)? Almost no one can sell in the first 10% of a cratering investment…….they end up selling in the last 10% of the drop.Like all investments, buying is easy (even a child can do it). Selling is the hard, adult part of the deal.Take everything you put in, times 2, out. Today. Pay the tax and buy yourself something nice.

      2. Tom Labus

        Take enough to diversify your investments and some for taxes since they will be going through the roof with the new tax legislation.

  9. jason wright

    ah, The Information. Did you see the interview Jason Calacanis did with the founder? Quite revealing about its ‘alignment’. It seems like a propaganda ‘voice’ serving incumbent interests in Silicon ValleyThis Rubin story is new to me. Thanks for the heads up. I have to say that I find the timing of it highly suspicious. Clearly an attempt to hurt Essential by the opposition at a sensitive moment in its development. The knives are out, which to me suggests he must be doing something right.I looked at the 2 XL. I didn’t quite see enough of ‘more’ over the 1 XL. I’ll wait for the 3.

    1. Susan Rubinsky

      It’s water resistant and also has a better camera from what I’ve read.

  10. JaredMermey

    Coinbase feature request: Show gains/losses.Not sure if that aligns with original intent of a wallet to send money to others but given how most are treating BTC/ETH/LTC it feels as if this would be moving with the market.

    1. mplsvbhvr

      Gemini too please….

  11. Susan Rubinsky

    Ooooo. I am thinking of getting that. The Pixel one had terrible camera quality and wasn’t water resistant.

  12. Miko

    Fidelity Charitable, which is the largest donor advised fund in the US, accepts Bitcoin through its partnership with Coinbase.

  13. Aravind B

    Is exchanging one crypto currency for another a taxable event?

  14. Lawrence Brass

    The day will come when the IRS start accepting tax payments in crypto. I hope this will happen before the singularity awakes and discovers how stupid he or she is. :)Switzerland towns Zug and Chiasso (starting Jan 2018) accept bitcoin payments for municipal expenses for limited amounts.

    1. JamesHRH

      Call me when someone pays their Zug property taxes in crypto.Isn’t the point of crypto not to pay tax?

      1. Lawrence Brass

        I don’t think that that is its purpose. I even think that if you want to do an illegal transaction or activity of any kind (as evading taxes), traditional crypto is a very bad choice as the transactions are logged forever in an indestructible ledger. OK, so you don’t know yet who are the owners of the wallets participating in a transaction, but the event is perpetually visible for further tracking and investigation, IP address matching, data analyses, etc.Well, let’s pay property taxes using traditional currencies, but we may buy some property using bitcoin. Unbelievable!

        1. JamesHRH

          Sorry LB. I was kidding

          1. Lawrence Brass

            never mind, I am not that serious. 🙂

  15. Kevin Hill

    Even though I’m much more bearish on proof-of-work style protocols than you are, this post is very responsible and reasonable. Thanks.

  16. Richard

    House money? There is no house? This is OPM. Bitcoin is zero sum game. It’s time for bitcoin transparency. Are we playing with blood money? Which underground economies are profiting from Bitcoin? Drugs, weapons, human trafficating? Are we putting the US Economy monetary system at risk? The US monetary system is the foundation of the world economy. Its time for this unregulated casino to stop.

  17. mplsvbhvr

    At what point is moving to the Cayman Islands a legitimate strategy?:DI’ll be paying my taxes… unfortunately… if I ever sell… but I don’t see that happening for sometime. Especially if we consider the implications of ERC-20 versions of national currencies being developed. What happens if I sell my ETH for $ETH or CADETH? Am I taxed on a UBI that is distributed over the ETH chain?Too much uncertainty for me to be selling anything at this point, even though I know the smart thing is to take some off the table. Hope everyone is enjoying the run up nonetheless!

    1. JLM

      .Do not move, just put your $$$ beyond the reach of the IRS in an entity which can maintain secrecy — Channel Islands Trust.Repatriate your $$$ using a series of loans from the entity to you.[Pro tip: Put big assets in a series of Delaware Corp subsidiaries which prevent any creditors from piercing the corp veil between and amongst assets, thereby making yourself judgement proof.]The proceeds of a loan are not taxable.This is what Paul Manafort did wrong (amongst several other things); he put his offshore income into Maltese and Cypriot trusts, but he failed to characterize the repatriation as loan proceeds.If he had done this, he would not be in 10% of the trouble he is in.It is all form over substance.JLMwww.themusingsofthebigredca…

      1. LE

        This is what Paul Manafort did wrongMoreover what Manafort also did wrong was not follow the Mafia credo of keeping a low profile. Anytime you have a public persona such as he did you are 1000x more likely to be scrutinized and potentially take a fall. While everyone should be careful with schemes someone in his position should also have realized when he took the Trump job that he would greatly broaden the attack surface as well as interest in what he is doing.

        1. mplsvbhvr

          So… delete my disqus account? 🙂

      2. mplsvbhvr

        Sometimes I feel like all of life is form over substance….Except for the comments section of AVC of course 🙂

        1. JLM

          .A very profound statement. Much of life is “form over substance.” It takes a wise person to recognize it and a brave person to act upon it.JLMwww.themusingsofthebigredca…

          1. mplsvbhvr

            Couldn’t agree more. Wise comes naturally to me, brave does not. Working on both every day.

      3. JamesHRH

        I take it that the GOP tax cut won’t have much of an impact on you.

        1. JLM

          .Right this instant, I don’t see the GOP tax cut getting done.It is going to get down to McCain, Flake, Corker, Collins, Murkowski, Sasse.Every one has a personal ax to grind with Pres Trump. There are three of them who are not worried about getting re-elected.It is absurd that Republicans cannot act in concert.JLMwww.themusingsofthebigredca…

  18. LE

    On the IRS doc the most interesting FAQ to me was this:Q-8: Does a taxpayer who “mines” virtual currency (for example, uses computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger) realize gross income upon receipt of the virtual currency resulting from those activities? A-8: Yes, when a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as ofthe date of receipt is includible in gross income. See Publication 525, Taxable and Nontaxable Income, for more information on taxable income

    1. JLM

      .Most of the Q & A makes sense, but this one does not. It seems that if you mine (create) something, then that establishes your basis in the property — the same as if I bought dirt and built a building.I can see their point, it is “of value” but it also could establish basis.JLMwww.themusingsofthebigredca…

      1. LE

        An argument could be made either way let’s say.If I decide to go door to door trying to convince little old ladies to sell me their treasure (which I know the value of but they don’t) ie ‘mining’ there is no tax due until I sell the treasure. This is at least partly because the government doesn’t have a practical way to track this type of transaction as much as anything. If I sell the treasure they are happy to get the tax paid. But what I have does have value beyond what my ‘cost’ was to obtain it. Not arms length, not auction and so on. And I don’t regularly trade in it and so on.On the other hand if I decide to go to the county fair and throw darts at a board whereby the dart hitting the board allows me to get a valuable piece of art ‘mining’ then I perhaps the IRS thinks that the basis is the value of that art on the day that the dart hit the board when I was the winner. This is because the art clearly is property which has a variable value as an appreciable asset ‘property’.I have to say that the IRS point immediately made sense to me. (Regardless of whether I would agree or disagree it wasn’t far fetched).My only thought was ‘well who is going to report that!’ but then followed with ‘hmm years later if you don’t report it could become a problem if they say you should have’ followed afterwords by ‘follow the stick rule’.In your real estate example there is a key difference. You said ‘same as if I bought dirt and built a building’. In that case you are transforming something plus the dirt was fairly valued when you bought it and transaction was arms length.I am buying a property from a relative. I am overpaying by an amount equal to roughly the allowed amount of gift income times 2 in order to increase the basis of the property so when I sell I will owe less taxes. The transaction is legit simply because a) the seller is selling at a loss and b) the price I am paying has been determined to be the fair value of the property and c) The gift ‘rebate’ is legit and an entirely separate transaction. I only wish the transaction amount was public so it would put upward pressure on prices and not neutral.Bottom line with many things tax wise you can’t rely on your accountant to figure out everything for you only as a resource to verify and gauge risk from any particular strategy.

        1. JLM

          .Use your same logic and use the example of literally mining gold. I don’t pay any tax when I bring gold to the surface or find a nugget in a stream.On the other hand, I get the argument of “constructive receipt” of something “of value.”JLMwww.themusingsofthebigredca…

          1. LE

            I don’t pay any tax when I bring gold to the surface or find a nugget in a stream.See this:In its 2013 tax guide, the IRS states, “If you find and keep property that does not belong to you that has been lost or abandoned (treasure-trove), it is taxable to you at its fair market value in the first year it is your undisputed possession.”The couple, who have not been publicly identified, found the coins in cans buried in their backyard in February 2013. That means they will owe tax on the estimated value of the coins by April 15 to avoid a penalty and interest, says Leo Martinez, a law professor at UC Hastings College of the Law.

          2. JLM

            .The operative words here are “undisputed possession.”This is the classic treasure hunter issue. I never invested in a treasure hunter, but I looked at several deals.When a treasure hunter finds treasure, it is critical to establish the taxing jurisdiction and whether are any there are any claims.It is a complicated world out there.JLMwww.themusingsofthebigredca…

          3. JamesHRH

            Seriously, you looked at a couple treasure hunter deals?

          4. JLM

            .Used to be a lot of deals out of Galveston.There are a lot wrecks in the Gulf in fairly shallow water.A lot of info from drilling platforms and towed seismic.JLMwww.themusingsofthebigredca…

          5. kidmercury

            Theres a whole industry of treasure hunters pitching investors for funding. Like any entrepreneurial funding niche, though more allegations of fraud and the whole mystery angle.

          6. JamesHRH

            Mining is a service, no? Paid in kind.

          7. JLM

            .Ore? Or, is it just a commodity function? I mine iron ore and it is not a taxable event until I sell the ore at a profit or loss to some third party?JLMwww.themusingsofthebigredca…

      2. Lawrence Brass

        Interesting. I think that the question is inducing an incorrect response though.I think that the incentive paid for transaction validation is indeed a commission, apt to being included in gross income. But crypto blocks produced by actual mining, which is an act of production or creation as you mention, are not.What do you think?

        1. JLM

          .I think the IRS is wrong. It is just like mining for gold or iron ore.JLMwww.themusingsofthebigredca…

      3. Adam Sher

        What would you consider you basis for the mined coin?

        1. JLM

          .Either zero or your COGS.A mining operation is done within some legal entity even if it is just a sole proprietorship. That entity would have a COGS (cost of good sold) which could be attached to the asset or it would file for a loss on its operations and a gain if and when it sold its Bitcoin (this is the way a real gold mine operates).When I was building high rise office buildings, I had a company and developed properties.The company charged a developer’s fee (typically 4-6% of project cost) to pay for its overhead. This was ordinary income to the development company. I tried to run the development company at a slight profit in order have as little “ordinary income” as possible, preferring the asset to hold the real value (which would be taxed one day as long term capital gain income).The project had a capitalized cost basis including land, construction cost, tenant improvement costs, marketing expenses (including leasing commissions, some of which might be earned by the development company), and interest reserves to break even.This total cost was the tax basis for the building. [The building would be owned by a limited partnership.]It is a very simple matter when developing assets.A gold mine would run as a single income statement on a calendar basis.This is very simple accounting stuff.Given that the IRS has declared Bitcoin is property, one would be tempted to jam as much value as possible into the property in order to avail themselves of the lowest possible tax rate.JLMwww.themusingsofthebigredca…

  19. JLM

    .If one reads the IRS Q & A — it is clear they consider Bitcoin to be “property” which means one can identify each individual bitcoin purchased and sold and be subject to classification as either ordinary income or capital gain based on the holding period.It is no different than how one would liquidate a 1,000,000 share stock position.Sell the highest basis Bitcoins first to reduce your tax liability.If you are dealing with an estate somewhere down the road, convey the most profitable Bitcoins in your estate wherein the beneficiary will receive them at a “stepped up basis” which means the tax never gets paid.If you donate Bitcoin to a charity, then your charitable deduction is at the market value on the date you make the donation. You would want to donate the individual Bitcoin you have the lowest basis in (meaning the most profit) so that if you sell Bitcoin you are selling off the ones with the least amount of profit and, thereby, the lowest amount of tax liability.This is pretty tame stuff and any marginally competent tax accountant can walk you through it. Once the IRS said Bitcoin is “property” the confusion is over.JLMwww.themusingsofthebigredca…

    1. LE

      Sell the highest basis Bitcoins first to reduce your tax liability.This 100% meets the ‘stick’ test as defined in my comment.

  20. OurielOhayon

    My understanding is that even if you use a credit card that allows you to spend your Crypto in Fiat money (eg Xapo…) you trigger a tax event at each purchase….what a headache for the user….

  21. LE

    We have very good tax advisors who will figure this stuff out for us.Generally with respect to taxes the thing that matters most is the size of the stick and the probability that you will end up on the other end of that stick. If the stick is ‘penalty and pay the tax due’ that is one thing. If the stick is ‘jail time for fraud’ that is another thing. Holding bitcoin or any crypto as an investment certainly has the potential to have a loss (from a wrong sell decision) that is way greater than the former ‘penalty and pay the tax’. When coupled with the chance of an audit which would be needed to uncover the wrong classification, it seems that most people playing in this space would (or should) in theory be more likely to take the risk and not overthink the finer points of how to classify the basis.With respect to tax advisers it’s probably a good idea also to talk to one that isn’t going to be filing your return in order to familiarize yourself but not get locked in by someone who also has a potential liability for advising you incorrectly.

  22. LE

    Separately from what I have observed in the most recent price swings I think the market is being manipulated. The amount of additional interest even given my other comment the other day to William about breaking the 10k barrier and resulting pr value seem to be out of whack with the universe of potential buyers and demand given how long it takes to even get setup to buy bitcoin.

  23. Evan Van Ness

    “encourage everyone to think about at least taking their cost off the table and playing with the house money at these levels.”I’ve never understood why people do this. What you paid for something has nothing to do with evaluating your current portfolio.

    1. LE

      This is 100% true by my thinking. It’s no longer house money if it’s your money. This is similar to people who get a gift and then think it’s ok to waste the gift money because ‘it’s found money’. Once something is yours it’s the same as anything and there is no reason to waste it or treat it any differently decision making wise.It’s well know though that people will not buy at a discount what they won’t sell at 100% ‘today’. For example someone like Fred is not selling and holding. However I am sure if you went to ‘Fred’ last week and wanted to sell him another 10% more bitcoin than he owns he probably wouldn’t do that. However he will hold on to what he already owns presumably for a long long time (although reading between the lines by today’s post wouldn’t surprise me if he was selling some..) Most likely someone won a nobel prize for writing a paper on this concept.I run into this constantly in the market that I trade in. People will not sell except at a very high and quite often unreasonable price. But if you present them with merchandise equivalent they are also literally not buyers even at 50% of the price or less (really).

      1. Lawrence Brass

        I think that it is ‘your money’ when you realize the gain or, in the case of a company, when you close the quarter or the year. Same for losses.I also think that people have emotional attachments with things and processes so there is ‘easy money’ and ‘hard earned money’. It is true that it is impossible to distinguish one from the other once it is deposited in your bank account or melted into a gold ingot in your vault.

    2. kidmercury

      In all walks of life, including personal finance, defense wins championships

    3. Gustavo Melo

      Psychological protection? The only “real money” is the money I put in, and taking it back out “removes it from risk”? Although when a long-term bet on bitcoin is really a bet on its widespread adoption vs. the currency you spent to get it, this seems to make less sense.

  24. Dennis Mykytyn

    I use this to track my gains: I use the free tier as I don’t trade much.It allows me to select a high cost sale method, to minimize gains. I also sent an email to Coinbase specifying that I will be using HC for all my trades in the future. This documents my method, as was formerly done with stock trades before brokerages started tracking gains themselves.CoinTracking also allows me to view both realized and unrealized gains, not just the current value.It would be nice if Coinbase wrote a few more lines of code to allow users to select options other than FIFO, which is almost always guaranteed to be the highest tax cost.

  25. Jan Schultink

    There is a scenario where Bitcoin could be worth this amount of money in the long-term, but nothing is sure. In the short term however, I think (a few?) very deep pocketed investors are playing the market. Fred is right, take your cost off the table, and then decide if you have the nerves to ride the roller coaster with the rest of your money.

    1. PhilipSugar

      You are right.We have a saying in poker if you look around the table and don’t know who the fool is…….it is you.If you aren’t on the team playing people at the table???? You are being played.

  26. PhilipSugar

    I am not making any predictions. Brad Feld says history does not repeat itself but it rhymes. Does anybody else remember a non liquid asset (as Fred says people don’t spend it) that had a huge run-up? Something that people said you could just store your wealth in?Remember the end?Now you physically cannot make more land….but????

    1. JamesHRH

      I am waiting for people to tell me that BTC can only go up, long term.Then its baked.

      1. PhilipSugar

        Ummmm, I seem to remember something similar. Store your money in your house, it can only go up.

  27. howardlindzon

    i wonder if this is the same for tokens ?

  28. ShanaC

    You’d figure that someone like coinbase would put this information in their help files….

  29. John R. Dundon II, EA

    Fascinating questions! My guess is that as long as taxpayers document a method – be it LIFO or FIFO or even a hybrid – AND use that method consistently the IRS should generally not have basis for scrutinizing or broadening authority. Also this post might help bring further clarity.

  30. Ken Fried

    Hi Fred, would love your thoughts on what the impact on Bitcoin would be if Governments start to issue their own coins backed by their respective currency? For example, if the Federal Reserve unveils FedCoin where 1 coin is backed by $1 USD. Would you expect a material impact? Your thoughts would be appreciated! thanks Ken

  31. Adam Sher

    It’s not house money – it’s your money. What’s the opportunity cost of leaving your unrealized gain in BTC? What’s the risk of realizing your gain at a later date by keeping your BTC?

  32. @dranejeremy

    I’m the Chief Commercial Officer for Libra (, we build software that automates financial business processes such as crypto tax calculation. Re method: you can pick what you want. We see a lot of LIFO as most recent buys/sells have the highest cost basis so you pay the lowest tax. What you want to do is essentially automate the matching of lots or acquisitions and disposal events across multiple exchanges and wallets. You want to create a “global” view of your trades so you can optimize the tax position. We are doing this type of stuff in seconds across millions of records for enterprises. What I would suggest is googling bitcoin tax software or the like, there are a variety of tools for individuals – we make one too. Choose one, load up your transactions then do a bit of scenario planning…try a few different accounting methods so you can see the differences. And, if you think that the IRS is not going to look for your gains, just read what’s going on at Coinbase. Best of luck. JD

  33. Martin K

    I love your blog, but I wanted to point out that the concept of “playing with house money” is psychological/used to justify bad decisions or overly aggressive gambling in a market that’s more or less completely liquid. (this doesn’t apply to angel/vc investing of course, where there is likely no reasonable way to reduce exposure.)Since it’s a liquid market, with crypto, either your level of exposure to something based on your assessment of risk is acceptable or it isn’t.I’ve been in/around professional gambling for quite awhile, so I learned this the hard way.Using “winnings” to gamble more aggressively is a quick path to going broke/losing more than you could really afford. Acceptable risk is just a % of your total capital. There is no such thing as “house money” unless you’re treating crypto investing like a weekend in vegas with your friends.

  34. Daniel Olshansky

    Here’s my problem with FIFO in the context of ERC20 tokens.Let’s say I bought ETH 1 year ago, and want to buy a FileToken without exiting my position. Since I can’t convert USD -> FileToken directly, I would have to buy ETH first and then convert. However, if FIFO is enforced, I’d have to pain capital gains taxes on ETH.There’s a couple approaches that come to mind immediately:1. Only tax cross-blockchain transactions2. Only tax transactions where there is no method to buy something directly from fiatI don’t have to outline the hundreds of problems with both of those, but things are very unclear.

  35. Michael Blend

    You most likely owe tax at the time of transfer to Golem. Caveat: I am not a tax advisor

  36. michelle

    The IRS notice indicates that gain/loss must be recognized on an exchange of virtual currency for other property (which cryptocurrencies are deemed to be). Conservatively, would recommend tracking all non-dollar transactions.Not official tax advice, but I summarized the IRS Notice a few months ago here: