The IRS openly acknowledges that bitcoin and other cryptocurrencies may be used to pay for goods and services. In fact, they can be readily exchanged for U.S. currency.
The question now is how about the tax ramifications. Bitcoin is not treated like a foreign currency for tax purposes. Instead, bitcoin is considered a “property” akin to an artwork sold for profit.
It is no surprise that profits from the sale of bitcoin implies a capital gain. The amount of tax depends on the length of holding the asset and the sale price. Over a year means a long-term capital gain at a lower rate than ordinary income.
Losers will enjoy a capital loss that can offset another capital gain. It all comes down to reducing your taxable income in such a case.
Apart from sales profits, what if bitcoin owners spend their asset on goods and services? Spending it implies a capital transaction given its status as a “property.”
Read the IRS fine print:
“If the fair market value of property received in exchange
for virtual currency exceeds the taxpayer’s adjusted basis
of the virtual currency, the taxpayer has taxable gain.”
It matters what you buy and when, also at what price. No doubt the IRS only cares about major expenditures. But if you have mined bitcoin, now they care and assess a capital gain. You have to add it to your tax return.
You need to assess your individual situation with digital currencies, noting whether your transactions or personal or for business. In the latter case, there could be a self-employment tax.
You can always check the virtual currencies guidelines established by the IRS. Some situations are complicated and may require consultation. No matter what, bitcoin users will ultimately pay their fair share of tax.