If the IRS demanded that we all pay capital gains tax on our Starbucks, there would be rioting in the streets. However, this exact scenario is one of the major taxation issues keeping Bitcoin out of mainstream retail payment systems.
This fact may take many investors by surprise, but cryptocurrencies are taxable assets. And, since very few of the millions of people currently holding cryptocurrencies have actually reported their assets to the Internal Revenue Service (“IRS”), the agency is actively pursuing tax enforcement actions against many of the early Bitcoin millionaires.
IRS Rules on Cryptocurrency Taxes
Cryptocurrencies, like Bitcoin and Ether, are characterized as capital assets by the IRS. This is the same way the agency treats real estate, vehicles, stocks, bonds, or valuable collectibles like art or antiques. Capital assets produce what is known as a capital gain (or loss). The amount you’ll have to pay in capital gains tax depends on how long you held the asset before you sold it. So, just like you have to pay capital gains taxes on art or real estate you sell for a profit, you have to pay capital gains every time you sell your Bitcoin.
Wait, How Much for a Latte?!?
When it comes to cryptocurrency, the IRS treats pretty much any expenditure as a sale of a capital asset. Ok, fine – but nobody is ever going to trade a car to the Starbucks barista for a double latte with extra foam. The same is not true with Bitcoin. So, while Bitcoin has the technological capacity to create secure, low-cost, and efficient retail payment systems, current tax policy is standing in the way. We all love our coffee, but if you have to pay extra to the IRS every time you buy a cup with Bitcoin, most of us will just stick with plain-old cash.
Crypto Tax Rules Get Complicated Fast – When in Doubt, Call a Professional
If you’re invested in cryptocurrency, the IRS is probably on your mind this tax season. Having an accountant who is specially trained in virtual currency tax compliance can be extremely valuable to your financial future. The friendly, qualified cryptocurrency accountants at Happy Tax stay current on the rules and regulations that affect virtual currency investments. If you hold, mine, or buy goods or services using cryptocurrencies, consult with a Happy Tax professional today.