How to do your Bitcoin taxes in 2025

Introduction: Bitcoin Taxes in 2025 and Beyond

With Bitcoin evolving rapidly, it’s no surprise that tax obligations for BTC holders are getting more complex. From simple buy-and-hold strategies to cutting-edge developments like Runes, Ordinals, and BRC-20 tokens, investors need to stay updated on how these activities affect their Bitcoin taxes.

This guide aims to demystify the process so you can accurately report gains, losses, and even income derived from these emerging Bitcoin protocols. Whether you’re a casual Bitcoin enthusiast or an active crypto trader, understanding the basics of tax compliance will help you avoid penalties and keep your digital assets growing.

Understanding Bitcoin’s Newer Innovations

What Are Runes?

Runes are a relatively new concept in the Bitcoin ecosystem, intended to be a token protocol leveraging the Bitcoin blockchain. Think of Runes as a way to create, manage, or track specialized tokens or data directly on Bitcoin—somewhat akin to ERC-20 on Ethereum, but with different constraints and features. If you’ve minted, traded, or received Runes, you’ll need to be mindful of the cost basis and potential capital gains or losses tied to each transaction.

What Are Ordinals?

Ordinals refer to a unique method of attaching additional data to individual satoshis, the smallest unit of Bitcoin (1 BTC = 100,000,000 sats). These inscribed satoshis can represent digital art or NFT-like collectibles on Bitcoin. When you sell or exchange an Ordinal (effectively transferring the satoshi tied to the inscription), that can be a taxable event. Even if you’re just storing these inscribed satoshis, it’s crucial to keep solid records of when you acquired them and their fair market value at that time.

What Are BRC-20 Tokens?

Modeled after Ethereum’s ERC-20 standard, BRC-20 tokens leverage Ordinals to function as fungible tokens on the Bitcoin blockchain. These tokens have become popular for creating community-based projects, meme tokens, and more. From a tax standpoint:

• Creating or Minting BRC-20: Could be seen as acquiring property at a cost basis of the fair market value when the token is created (often the cost in sats or the cost of the transaction fees).
• Trading BRC-20: Any sale, swap, or trade for another asset or fiat currency is potentially a taxable event.

Taxable Events to Watch Out For

When dealing with Bitcoin runes, ordinals, or BRC-20, keep an eye out for the following taxable events:

1. Selling Bitcoin (or Runes, BRC-20 tokens, or Ordinals) for fiat currency (USD, EUR, etc.).
2. Swapping from BTC to another crypto asset or from a BRC-20 token to BTC.
3. Minting or Creating new tokens or inscriptions (if there’s a clear “income” component or if the tokens have immediate market value).
4. Receiving Staking or Airdrop Rewards (if Bitcoin-based staking or additional yield programs exist).
5. Paying for Goods or Services in BTC or BRC-20 tokens, which can be treated like selling property.

Tracking Transactions and Cost Basis

1. Use a Dedicated Crypto Tax Tool

Given that Bitcoin’s advanced features aren’t always supported by basic portfolio trackers, it’s wise to rely on specialized software. Tools like Awaken Tax have functionality for Ordinals and alternative protocols. They pull transaction data from block explorers or integrated APIs, helping you:

• Identify Cost Basis: The original price paid (plus fees).
• Separate Short-Term vs. Long-Term Gains: Assets held under one year are often taxed at higher rates than those held over a year.
• Generate Accurate Reports: Export forms for your region (e.g., Schedule D, Form 8949 in the U.S.).

2. Manual Record-Keeping

If your chosen tax software doesn’t fully support Runes or BRC-20, track these manually:

• Date of Acquisition
• Quantity of Tokens or Sats
• Transaction Hash
• Fair Market Value in BTC or Fiat
• Any Associated Fees (including network fees)

Best Practices for Reporting Bitcoin-Related Income

1. Document Each Inscription: If you’re creating or buying Ordinals that might appreciate in value, log the date, the total sats, and any references to external pricing.
2. Flag Airdrops or “Free” Tokens: If you receive a BRC-20 token at no cost, the fair market value when you receive them could be treated as ordinary income, depending on local laws.
3. Separate Personal vs. Business Transactions: If you’re developing a BRC-20 project or regularly flipping Ordinals, you may need to treat this as a business activity, which has different tax implications (e.g., business expenses, self-employment tax).
4. Use Multiple Wallets: Keep personal investments separate from more experimental or business-related wallets. This simplifies your record-keeping.

Common Pitfalls and Mistakes

1. Ignoring “Insignificant” Fees: Network fees on Bitcoin can be substantial, especially if the network is congested. Not adding these fees to your cost basis can lead to inaccuracies.
2. Mislabeling Transfers: Moving your BRC-20 tokens from one Bitcoin wallet to another is generally not a taxable event—don’t mistakenly log these as sales.
3. Overlooking Airdrops: Some Ordinals or BRC-20 tokens are distributed for free, but free doesn’t mean tax-exempt if they have market value upon receipt.
4. Neglecting NFT-Like Activity: Ordinals may function similarly to NFTs. If you buy or sell them at a profit, that’s a capital gain.

Frequently Asked Questions (FAQs)

1. If I just hold Bitcoin Ordinals, do I owe taxes?

Generally, holding does not trigger a taxable event. However, if you sell, swap, or otherwise dispose of the Ordinals, you may owe taxes on any capital gains.

2. Are Runes or BRC-20 tokens treated differently from Ethereum-based tokens for tax purposes?

While the technology differs, most tax authorities still classify them as digital property. The same principles (cost basis, gains/losses, etc.) generally apply.

3. How do I find the fair market value of BRC-20 tokens?

Check reputable crypto data aggregators or decentralized marketplaces that provide trading pairs for your BRC-20 token. The fair market value is the going rate in a legitimate, active marketplace.

4. Do I need separate software for runes or BRC-20 tokens?

Many existing crypto tax platforms are expanding coverage to new Bitcoin protocols. If you can’t automatically import data, you may need to manually track these transactions for now.

5. What if I create Ordinals as an artist?

Creating digital art with Ordinals may be considered creating inventory if you’re a professional. When you sell them, taxes could apply to any gains. Consult a tax professional if this is a large-scale venture.

Conclusion

Bitcoin has evolved far beyond simple peer-to-peer transactions—Runes, Ordinals, and BRC-20 tokens add new layers of creativity and opportunity. Along with that excitement comes a responsibility to handle your taxes properly. By knowing what constitutes a taxable event, keeping detailed records, and leveraging specialized crypto tax software, you can stay compliant and avoid stress.

Disclaimer: This article is for informational purposes only and does not constitute tax, financial, or legal advice. Always consult a qualified professional for guidance tailored to your specific situation

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