By now I'm sure that you've at least heard of Bitcoin. It's been blowing up lately in the media due to its extremely high market prices.
But many people don't have a clue what a Bitcoin is or how it actually works. If you don't know much about them, don't be embarrassed, it's confusing and pretty new to the mainstream. (PssT! Click here to read our article, 12 questions you're too embarrassed to ask about Bitcoin.)
Before you decide to invest in Bitcoin, there are some tax implications that you really need to know about first.
Do you owe taxes on Bitcoin?
According to the U.S. government, it doesn't matter if you're using Bitcoin as currency or an investment. Either way, you have to pay taxes on it.
That's because the IRS does not consider Bitcoin a currency. Instead, it is classified as property, which can be a little confusing.
Using Bitcoin to make purchases
If you were to purchase something with Bitcoin, the government considers that as two different transactions. The first transaction is the act of selling property for a specified cash value.
The second transaction is using that cash value to buy whatever it is you're purchasing. That means every purchase that you make using Bitcoin must be reported on your taxes.
Using Bitcoin as an investment
For investors, it's taxed differently. If you own Bitcoin for less than one year and decide to sell, it is taxed as income.
If you invest in Bitcoin and hold on to it for more than a year, it will be taxed as a capital gain when you sell. This could be taxed up to 20 percent. Adding accounting and transaction fees could considerably raise the cost of investment.
The government has had trouble collecting these taxes. Many people have failed to report Bitcoin transactions to the IRS.
In fact, fewer than 900 people reported Bitcoin transactions each year from 2013 to 2015. Lack of reporting transactions is what led the IRS to classify cryptocurrencies as property back in 2014.
There might be hope for future investors. A bill dubbed The Cryptocurrency Tax Fairness Act was introduced by Congress last September. If passed, it would create a tax exemption for all cryptocurrency transactions that are less than $600.
For a more in-depth discussion on Bitcoin, listen to Kim's free podcast
Listen to my FREE Komando on Demand podcast, as I answer the questions you’re too embarrassed to ask and find out the pros and cons of buying and selling Bitcoins.
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