Cryptocurrencies like Bitcoin have moved from the margins to the mainstream in just a few years. Are they financial game changers or just another tech trend? The answer depends on whom you ask. But, one thing is certain: if you own Bitcoin or other similar digital tokens, you’ll have tax consequences.
Crypto technology allows you to send something of value to another person without a bank or credit card company. Instead, these peer-to-peer networks rely on users and built-in guardrails to certify that if Person A sends money—in the form of crypto—to Person B, Person B now owns those funds.
Why you owe capital gains taxes
When Bitcoin, the most popular cryptocurrency, first surfaced in a 2008 white paper, the idea was it could serve as digital cash. However, crypto tokens are most often used like stocks in the stock market, with investors buying and selling different tokens to make a profit. As a result, the IRS in 2014 defined cryptocurrencies as property, meaning these transactions can create a taxable gain or deductible loss.
The same rule applies if you use Bitcoin like cash to buy airline tickets or other goods and services. You need to know the Bitcoin token’s value when you first bought it and its value when you sold it to pay for your flight. Because our tax system requires individuals to pay tax on profits—known as capital gains—from selling or exchanging assets like stocks or real estate, using cryptocurrencies for everyday purchases complicates a tax return.
Some lawmakers have proposed rules to exempt small-dollar transactions from these tax obligations to make taxpayers’ lives simpler and encourage the use of cryptocurrencies instead of cash. Others have questioned that approach and suggested that the tax code should tax crypto based on how these assets are actually used.
The outcome of this debate depends on how Congress and the IRS decide which cryptocurrency firms are obligated to assist taxpayers with tax reporting, like traditional financial firms and brokers do. Lawmakers recently voted to rollback IRS regulations issued during the Biden administration that attempted to expand the tax reporting obligations of crypto firms.
Crypto asset owners are still required to report their gains and losses when filing their taxes regardless of the purpose of the transactions. There is also evidence that cryptocurrency users trust traditional currencies like the US dollar and want to comply with the tax code. But policymakers will need to clarify roles and responsibilities for crypto users and businesses.
