Virtual currencies such as Bitcoin or other "cryptocurrencies" are taxed differently from cash or coin currency.
If, in 2020, you engaged in any transaction involving virtual currency, check the “Yes” box next to the question on virtual currency on page 1 of Form 1040 or 1040-SR.
According to IRS Instructions for Form 1040 and 1040-SR, on page 16:
A transaction involving virtual currency includes, but is not limited to:
The IRS generally recognizes virtual currency as property, not legal tender. As such, virtual currency received as payment by an individual or business must be included as miscellaneous income as an exchange of property or service. The value of the payment is determined by the Fair Market Value (FMV) on the date of receipt. The virtual currency must be translated to the legal tender equivalent and then included in income. For more information, see IRS Publication 525 Taxable and Nontaxable Income.
If you received virtual currency as wages, those payments will be recorded on a Form W-2 Wage and Tax Statement by your employer. If you are paid in virtual currency as an independent contractor, you will receive a Form 1099-MISC Miscellaneous Income.
A sale or exchange of virtual currency held as a capital asset will result in a gain or loss reported as a Sale or Disposition of Assets. Like stocks, the taxpayer must determine the basis and calculate the gain or loss. For more information, see IRS Publication 544 Sales and Other Dispositions of Assets and IRS Publication 551 Basis of Assets.
You can figure your gain or loss from sales or exchanges of virtual currency on Form 8949 Sales and Other Dispositions of Capital Assets.
With paper currency, the government controls printing and regulation. Virtual currency must be discovered, or mined, by its community of users. Mining virtual currency, though complicated, can be profitable. Like other gig economy income, virtual currency mining earnings may be subject to self-employment tax.
To learn more about the tax treatment of virtual currency, see the IRS Virtual Currency Guidance webpage or IRS Notice 2014-21.
Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.