Bitcoin Taxes and Market Cycles: A Strategic Guide for Active Traders

Bitcoin is down nearly 47% from its October 2025 all-time high. If you've been trading through this cycle, your tax situation is probably complicated.

I'm Chris Herbst, founder of CountDeFi. I've spent the better part of a decade helping Bitcoin traders navigate their taxes through every phase of the market, and the pattern I see repeating is the same every cycle: people think about Bitcoin taxes after the fact, when the real advantage comes from thinking about them during the trade.

This guide is for active traders who buy and sell Bitcoin across bull and bear markets. The goal isn't to make you a tax expert. It's to show you how Bitcoin taxes work at each stage of the cycle, so you can make better decisions with your money. (For a broader overview of how all digital assets are treated, see our guide on how crypto is taxed in the US.)

How Bitcoin Is Taxed: The Basics That Never Change

Before we get into strategy, the fundamentals. The IRS treats Bitcoin as property under Notice 2014-21. Every time you sell, trade, or spend Bitcoin, it's a taxable event. Two things determine how much you owe: how long you held it and how much profit (or loss) you realized.

Short-term capital gains apply to Bitcoin held for one year or less. These are taxed at your ordinary income rate, which can run as high as 37% at the federal level for high earners.

Long-term capital gains apply to Bitcoin held for more than one year. The rates are significantly lower: 0%, 15%, or 20%, depending on your taxable income.

The spread between short-term and long-term rates is the single most important variable in Bitcoin tax planning. For a trader in the 32% bracket, the difference between selling Bitcoin at 11 months versus 13 months can be the difference between paying 32% and 15% on the same gain. On a $50,000 Bitcoin profit, that's $8,500.

This isn't abstract. This is the math that should inform when you take Bitcoin profits, when you harvest losses, and how you structure your trades.

Bull Market Bitcoin Taxes: When Profits Feel Free (They're Not)

Bull markets create a specific tax problem: they feel good, so people don't think about the tax bill they're building.

Here's what happened to a lot of Bitcoin traders over the past two years. Bitcoin ran from under $30,000 in late 2023 to over $125,000 by October 2025. People were trading frequently, rotating between BTC and altcoins, taking profits on the way up, and spending Bitcoin directly. Every one of those transactions was taxable. Many of them were short-term.

By the time tax season arrived, the bills were staggering. I had clients at CountDeFi who owed six figures in Bitcoin capital gains taxes on profits they'd already reinvested into other positions. The money was gone, but the tax liability wasn't.

The bull market playbook for Bitcoin taxes:

Track your Bitcoin holding periods obsessively. If you're sitting on a Bitcoin gain and you're close to the one-year mark, the tax savings from waiting can be substantial. This is the easiest, most impactful tax optimization available to Bitcoin traders.

Don't confuse unrealized Bitcoin gains with free money. If you sell Bitcoin at a profit, you owe tax on that gain whether you cash out to USD or rotate into another token. Swapping Bitcoin for ETH, SOL, or any other crypto is a taxable event.

Set aside tax reserves in real time. At CountDeFi, we tell active Bitcoin traders to set aside 25-30% of every realized gain as they go. If you wait until April, you may not have it.

Use your cost basis method strategically. If you're selling partial Bitcoin positions, the lot you choose to sell matters. HIFO (highest in, first out) sells your most expensive Bitcoin first, minimizing the taxable gain. Notice 2025-7 provides temporary relief for how taxpayers can adequately identify which specific units are being sold when those units are held with a broker during the 2025 tax year, which can support specific-unit identification methods like HIFO. The flexibility is there if you act intentionally.

Bear Market Bitcoin Taxes: Losses Are an Asset

Bear markets are painful. But from a tax perspective, they're an opportunity most Bitcoin traders underuse.

Right now, with Bitcoin trading near $68,000 and down from its $126,000 all-time high, a significant number of traders are sitting on unrealized Bitcoin losses. If you bought BTC during the late 2025 run-up, your position may be deeply underwater. That's not just bad luck. It's a tax asset, if you know how to use it.

Tax-loss harvesting is the practice of selling Bitcoin at a loss to realize a capital loss you can use to offset gains. The IRS lets you offset capital gains dollar-for-dollar with capital losses. If your losses exceed your gains, you can deduct up to $3,000 per year against ordinary income, with unlimited carryforward into future years.

Here's what makes Bitcoin tax-loss harvesting uniquely powerful right now: the IRS wash sale rule under IRC §1091, which prevents stock investors from selling at a loss and immediately rebuying, does not currently apply to cryptocurrency. Bitcoin is classified as property, not a security. That means you can sell your Bitcoin at a loss, repurchase it, and claim the full loss deduction.

A word of caution on timing. Multiple legislative proposals since 2021 have aimed to extend wash sale rules to crypto, but none have passed. As a matter of prudence (not legal requirement), many tax professionals recommend waiting a few days before rebuying and maintaining records that demonstrate economic substance behind the transaction. The IRS can challenge transactions that lack economic substance under general anti-abuse doctrines, even outside §1091. The window may not stay open forever.

Practical example: You bought 1 BTC at $110,000 during the October 2025 peak. Bitcoin is now trading near $68,000. You sell and realize a $42,000 capital loss. You rebuy Bitcoin a few days later. You now hold the same amount of BTC at a lower cost basis, but you have a $42,000 loss to deploy against current or future gains. If you had $42,000 in short-term gains from earlier in the year, that loss just erased your entire tax bill on those gains.

Tax-loss harvesting works best when you do it intentionally throughout the year, not just in December. At CountDeFi, we review client portfolios quarterly and identify Bitcoin harvesting opportunities in real time.

The Cycle Transition: Where Most Bitcoin Traders Get It Wrong

The most expensive Bitcoin tax mistakes happen at cycle transitions. Not at the top. Not at the bottom. In the messy middle, when it's unclear whether you're in a correction or a bear market.

This is exactly where Bitcoin sits in February 2026. BTC hit $126,000 in October 2025. By late December, it had dropped 30%. In early February, it briefly dipped near $60,000. As I write this, Bitcoin is trading around $68,000. Depending on who you ask, we're either in the early stages of a multi-year bear market or consolidating before the next leg up.

The Bitcoin tax implications depend entirely on what you do next:

If you sold Bitcoin during the decline, you've realized losses. Those losses are valuable. Don't waste them. Use them to offset gains from the bull run. If you have more losses than gains, carry them forward. They don't expire.

If you're holding Bitcoin through the drawdown, you have no taxable event. Unrealized losses don't count for tax purposes. If you believe in the long-term thesis, holding is both a valid investment strategy and a tax-neutral one. But if you're going to hold regardless, consider whether selling and rebuying to capture the loss is worth the short-term effort. In many cases, it is.

If you're buying Bitcoin on the dip, your new purchases establish a fresh, lower cost basis. If Bitcoin recovers, you'll owe tax on the difference between your new purchase price and your eventual sale price. This is a fine outcome, but track your lots carefully. Future you will thank present you for clean records.

If you're actively trading Bitcoin volatility, every trade generates a taxable event. Short-term gains in a choppy market can add up quickly, and they're taxed at your highest marginal rate. Make sure the trading edge you think you have actually exceeds the tax drag.

Bitcoin Taxes Most Traders Forget About

Capital gains on Bitcoin get all the attention, but Bitcoin can generate other types of taxable income that catch traders off guard.

Mining income. If you mine Bitcoin, the fair market value of the BTC you receive is ordinary income at the time of receipt. This is true even if you don't sell it. You're taxed when you earn the Bitcoin, not when you dispose of it.

Staking rewards. Bitcoin doesn't use proof-of-stake natively, but if you earn yield on BTC through lending platforms or wrapped Bitcoin products (like WBTC on Ethereum or other DeFi protocols), those rewards are generally taxable as ordinary income at fair market value when received. The IRS confirmed this treatment for staking in Revenue Ruling 2023-14. (For a detailed walkthrough, see our guide on how to report crypto staking rewards on your taxes.) This is one area where Bitcoin taxes differ from something like Solana, where native staking is built into the protocol and generates frequent, small reward events that create their own reporting complexity. (We cover that in our Solana tax guide.)

Airdrops and forks. If you received new tokens from a Bitcoin hard fork (like Bitcoin Cash in 2017) or an airdrop, those are ordinary income at the fair market value when you gain dominion and control.

Payments received in Bitcoin. If you're paid for goods or services in Bitcoin, whether directly on-chain or via the Lightning Network, that's ordinary income. If a client pays you 0.1 BTC for consulting work, you report the USD value at the time of receipt as income. The payment method doesn't change the tax treatment.

Wrapped Bitcoin (WBTC). Wrapping BTC to use in DeFi protocols may itself be a taxable event. The IRS hasn't issued definitive guidance on wrapping, but the conservative position is that converting BTC to WBTC is a disposition. If you're using wrapped Bitcoin in DeFi, track the wrap and unwrap as separate taxable events until the IRS says otherwise.

All of these events establish a cost basis for the Bitcoin you received. When you later sell that BTC, you'll owe capital gains tax on the difference between the basis (what you reported as income) and the sale price. Don't double-count, but don't forget the first layer either.

The 2025 Tax Year: What's Different for Bitcoin

If you traded Bitcoin in 2025, your tax situation in 2026 has a few new wrinkles.

Form 1099-DA. For the first time, brokers reported your Bitcoin sales to the IRS on Form 1099-DA. If you sold BTC on Coinbase, Kraken, Gemini, or any other custodial platform, the IRS has a record of your proceeds. Your Form 8949 needs to align. (For a full breakdown, read our Form 1099-DA guide.)

Cost basis is not on the form. For the 2025 tax year, brokers reported gross proceeds but were not required to report cost basis. If you report Bitcoin proceeds without basis, your gain can be overstated and you risk IRS mismatch notices.

The Form 1040 digital assets question. Everyone filing a 1040 must answer whether they received, sold, or otherwise disposed of digital assets during the year. If you traded Bitcoin, the answer is yes. Don't skip it.

The IRS can see more than you think. Form 1099-DA is just the beginning. The IRS has been using blockchain analytics tools since 2015 and has obtained exchange data through John Doe summonses. If you're wondering whether the IRS can actually track your Bitcoin activity, the short answer is yes. (We cover this in detail in our guide on whether the IRS can track crypto.)

Consider an extension. If your Bitcoin tax situation is complex, if forms are delayed, cost basis is unclear, or you're still reconciling trades, filing Form 4868 for an automatic extension to October 15 is a legitimate option. (More on that in our IRS tax extension guide.)

Bitcoin Tax Strategy Is Year-Round, Not Seasonal

The traders who pay the least in Bitcoin taxes aren't the ones with the cleverest accountants. They're the ones who think about taxes before they trade, not after.

That means tracking Bitcoin holding periods before you sell. Harvesting losses in real time, not scrambling in December. Choosing cost basis methods intentionally, not defaulting to whatever your software picks. Setting aside reserves during bull runs so you're not liquidating Bitcoin positions to pay the IRS.

At CountDeFi, we work with Bitcoin traders throughout the year, not just at tax time. The clients who engage with us quarterly rather than annually consistently pay less in taxes on similar trading activity. That's not magic. It's planning.

Need Help With Your Bitcoin Taxes?

Whether you're sitting on Bitcoin gains from the bull run, losses from the correction, or a complicated mix of both, CountDeFi can help you:

• Reconstruct Bitcoin cost basis across every exchange and wallet you've used, even when transaction data is incomplete or inaccurate. (See our guide on how to handle missing or inaccurate crypto transaction data.)
• Identify tax-loss harvesting opportunities in your current Bitcoin portfolio
• Optimize your cost basis method to minimize your 2025 Bitcoin tax bill
• Reconcile Form 1099-DA with your actual Bitcoin trading history
• Build a forward-looking tax strategy that adapts to market conditions

Bitcoin taxes reward the prepared. Start by booking a free call with one of CountDeFi's bitcoin tax specialists.