Bitcoin reached a new all-time high amid the news that Tesla bought $1.5B in Bitcoin and holders will be able to buy a Tesla with Bitcoin.
However, there are a few tax implications you should be aware of when purchasing a product/service with Bitcoin or any cryptocurrency.
As the number of crypto whales increases, the investment and payment options within crypto (e.g., interest) open up. However, we are still lacking the chance to buy many products with crypto without going through third-party options.
As a result, Tesla’s announcement excited crypto riches as a new way to spend their profitable investments and start looking at Tesla design preferences.
In this article:
What are the tax implications on purchases with Bitcoin?
According to the IRS crypto guide, any crypto-to-FIAT or crypto-to-crypto transaction or purchase made with crypto is a taxable event. This may surprise new crypto enthusiasts due to the additional tax implications if you try to conduct your daily purchases only with Bitcoin or another crypto.
For clarification on your tax obligations as a crypto holder, check out our comprehensive guide about which crypto events are taxable.
According to current rules, when you make a crypto purchase, you’re entering into a 2-steps transaction: First, you need to determine if you had a profit on the sale of the cryptocurrency you used to make the purchase; secondly, your purchase of the service/goods.
Let’s see what your total tax implications and bill is if you buy a Tesla with Bitcoin under the current rules in the US.
John buys a Tesla (Model S) with Bitcoin: Tax Implications
Currently, a model S (Tri-Motor All-Wheel Drive) costs around $120K. Let’s imagine that John bought Bitcoin at the beginning of 2021 when it was $35K. He bought 4 BTC for a total of $140K.
Let’s assume that in May 2021, Bitcoin’s price reaches $55K and Tesla already accepts payments in Bitcoin. John buys model S for $120K (fair market value at the time of the purchase, ignoring sales tax for the purpose of this example). At that time, John will need to use 2.1818 BTC to make that purchase.
Since John will be selling that Bitcoin at a profit, he’s liable for capital gains tax. In this case, it will be a short-term capital gains tax rate because he’s selling before holding it for 12 months.
Profit on the sale of Bitcoin: (2.1818 x $55K) – (2.1818 x $35K) = $43,636.36
John will pay $15,272.72 in taxes, assuming a 35% short-term rate*. On top of the $120,000 Tesla purchase, John will have to pay more than $15K in capital gains taxes for a total bill of over $130K.
Reduce your bill with careful tax planning
Under the current IRS guidance, John’s total bill is considerably higher due to the capital gains taxes.
There are a few ways to legally reduce your tax bill in a case like this. For example, you can postpone the Tesla purchase for a few months to obtain a long-term capital gains tax treatment (tax rate ranging from 0% to 20% in the US). Alternatively, you can get a crypto loan to make the purchase of Tesla. No capital gains tax needs to be paid if you are using a loan for the purchase.
If you carefully plan your purchases and are aware of the tax benefits and caveats in your situation, you’ll still be able to be crypto-tax compliant and enjoy your Tesla.
*Short-term capital gains tax rates range from 10% to 37% in the US. We assume a 35% short-term capital gain tax for simplicity purposes. However, these rates are merely indicative as the real ones will depend on your total taxable income level, filing status (e.g., married/single), and other factors as a US taxpayer.
*This post is part of the Crypto Taxes AMA series. Follow our weekly AMAs on Twitter where our expert CPA, Sharon Yip answers your crypto tax questions.
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If you need personalized help reviewing your transactions or preparing your US tax returns, check out our CoinTracking Full Service, provided by a team of crypto tax professionals led by Sharon Yip, the export CPA who helped us put together these insights.
Follow our guides on how to excel with crypto taxes:
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Earn Interest on Crypto: The Taxes Guide.
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2021’s NFT guide (with taxes).
Is Bitcoin taxable? The ultimate guide for 2021 taxes.
Tax implications of getting paid in Crypto.
Bitcoin Millionaire? An inheritance plan for wealth.. with taxes.
Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.