One bitcoin is worth $9,712 as of Wednesday. And just like most valuables, the IRS gets a cut.
Bitcoin, Litecoin, Dogecoin and Ethereum are examples of cryptocurrency, a form of digital money. But the IRS treats them as property, not money.
So for tax purposes, these currencies are treated more like stocks, said April Walker, lead manager of the tax practice and ethics team at the American Institute of CPAs. Because of this, cryptocurrency is most often taxed when you're selling it, as capital gains, though you have to report both gains and losses on your tax return.
How capital gains taxes work
Capital gains taxes are assessed at different rates depending on how long you've held the asset you're selling. If you've held the asset for more than one year before selling it, you'll generally pay a lower rate, depending on your income.
Read our guide to tax brackets to see a breakdown.
This makes buying stuff with cryptocurrency really complicated during tax season. Say you buy a cup of coffee with bitcoin. For tax purposes, this would be treated as a sale of bitcoin, meaning you'd need to know if and how much the value of the bitcoin changed from when you bought it to when you sold it in exchange for the coffee. If you made a profit, you'd pay a capital gains tax.
"Tracking the ins and outs of that is very difficult and challenging," Walker said. Though she noted there is software that can help track these transactions.
Cryptocurrency may also be taxed as income.
"If you received virtual currency in exchange for services, it would be treated as wages," Walker said.
As with other wages, you should receive a W2 or 1099 to help report the income on your tax return.
What should I do if I have cryptocurrency?
Unlike holding a stock portfolio with a company that will track gains and losses for you and give you a 1099 form summarizing them, you're on your own with cryptocurrency transactions. Walker recommends talking with a certified public accountant or other tax professional to help you account for these transactions on your tax return.
The IRS also has an FAQ guide on virtual currency transactions on its website.
Want to get started your taxes? Read our comprehensive guide.
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