The Implications of Investing in Bitcoin: Is it Still a Thing?
Only a few years ago, the Bitcoin craze took over the financial world. While this cryptocurrency is still an emerging digital financial trend where many leverage it as an investment in their portfolio, some aspects of Bitcoin are often overlooked such as the tax implications that come with investing.
As with all topics related to taxes, it’s critical not to get caught off guard and left unaware of your tax liabilities. If you’re involved in Bitcoin investing, read on to learn what doing so means for your taxes.
How the IRS Classifies Bitcoin
Bitcoin was established to be an alternative currency. The idea was that Bitcoin had no conversion factors or fees between countries, meaning it was all tied to a central repository that is separate from any single bank or institution. Like all digital currencies, Bitcoin can typically be treated as a currency and used in the exchange of goods and services, making it seem and act like regular currency backed by a government.
However, that does not mean the IRS considers someone exchanging Bitcoin to be the same as an exchange of money. Instead, the IRS considers Bitcoin to be a convertible virtual currency and thus property. While Bitcoin has an exact value that can be converted to ‘real’ currency, it does not mean that it is treated as such.
What Bitcoin Means for Taxes
Given that the IRS considers Bitcoin to be property, the parallels for how it’s treated stretch to other types of property. If a job or a client were to pay you in different property types, such as goods, or even stock, you still owe income tax based on that property’s fair market value. Similarly, if you are paid for a job you do for someone in Bitcoin, you owe taxes based on the value of that Bitcoin when the transaction occurs.
Another parallel with other types of property is in gains and losses. If you buy a house and then end up selling it a few years later for more than you paid, those gains are taxed as capital gains. Just the same, if you buy Bitcoin and then sell it later on, the relative gains must be taxed, and the losses can be considered as such on your tax return.
Thankfully, the IRS has adapted quickly to ensure digital currencies such as Bitcoin cannot be used as a tool for people to avoid paying their taxes. If you’ve bought or sold Bitcoin and are unsure how it will impact your upcoming taxes, Tobin and Collins can help. Our tax consultants are ready and able to assist you in your tax returns. Contact us today!