Did You Sell or Spend Bitcoin in 2020? Here’s What You Need to Know About Taxes

While the IRS acknowledges that bitcoin and other cryptocurrencies can be used to pay for goods and services in many cases, and can be readily exchanged for U.S. currency, it treats it a bit differently than foreign currencies for tax purposes.

Specifically, the IRS classified bitcoin as property. This means it is treated the same as if you bought a piece of artwork and sold it for a profit, or if you sell a stock for more than you paid. If you bought, sold, spent, or even mined bitcoin in 2020, here’s a primer on how it could affect your tax bill.

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Capital gains tax 101

For this reason, profits that result from selling bitcoin will result in a capital gain (foreign currency gain or loss is a different concept). You can read our guide to 2020 capital gains taxes, but the key thing to know is that there are two kinds of capital gains:

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If you owned an asset for a year or less, a profitable sale will result in a short-term capital gain, and will be taxed just like ordinary income.
If you owned an asset for more than a year, a profitable sale will result in a long-term capital gain, which has generally lower tax rates.

And while it isn’t much of an issue right now, if you sell bitcoin for less than you paid for it, you will have a capital loss, which can be used to offset other capital gains and might even be able to reduce your other taxable income.

Did you spend bitcoin? It could get complicated

Here’s where it can make your tax return really complicated. When it comes to bitcoin and other cryptocurrencies, you might find yourself owing taxes simply for spending bitcoin to pay for goods and services.

Because the IRS taxes bitcoin as property, not as a currency, spending it is considered to be a capital transaction. According to the IRS’s guidance on the matter, “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.”

Here’s what this means. Let’s say that you bought $100 worth of bitcoin and its value rose to $300 over the next year. If you use your bitcoin to buy an airline ticket that would sell for $300, you have a $200 taxable gain on the purchase. Conversely, if you spend bitcoin that you paid more for, you could have a loss for tax purposes.

As you can probably imagine, if you use bitcoin to pay for goods and services regularly, this can get rather complicated. Especially if you bought bitcoin on various dates for different prices. Now, the IRS isn’t likely to track you down and audit you if you buy a $2 soda with bitcoin you paid $1 for. But if you make any substantial purchases with appreciated bitcoin, be sure to keep track and report them.