Tax Implications on the Use of Bitcoins: Procedure and Treatment

Every time a bitcoin is sold, bought or exchanged, it is being taxed. The Internal Revenue Service or IRS states that bitcoins and convertible digital currency are treated as properties and not as currencies. Virtual currencies are considered as property with taxes payable. This simply means that one can have gain or loss on their capital. Your income, for example, is taxable and so as digital currencies if you are paid in such.

On Legal Matters and Authority

On the perspective of taxation, cryptocurrency is a virtual representation of values that serves as a medium of trade and exchange, an account or a value stored. It does not have legal tender in the jurisdiction.

Digital money has an equivalent in terms of physical money and it can serve as a substitute. In the view of federal taxation, cryptocurrency such as Bitcoin is considered property. The general tax rules applied on property transactions are also applicable in virtual money.

When Bitcoins Are Being Taxed

Below is a list on what happens when taxes are applied if bitcoins are purchased, sold, or disposed of.

  • There is income in any property gained.

  • Gains can be measured between the price of purchase and the gross amount of proceeds acquired from selling by means of change in real money value.
  • The short-term or long-term duration of properties held decides the tax rates.
  • Selling of properties should be reported on the tax return using Form 8949 and Schedule D or Form 4797.


Tips to Consider Before Investing on Bitcoin

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Some tips for business people and market investors planning to use Bitcoin and other cryptocurrencies:

  • Make sure that you have a consistent exchange rate to use in evaluating the value of bitcoins acquired.

  • Always charge sales tax every time a customer buys properties from you using bitcoin.
  • When you are paying independent contractors above $600, demand a Form W-9 and deliver Form 1099-MISC.
  • When paying taxes, they are always in real money. Learn to convert bitcoins into real currency on a regular timetable. This saves time and makes it easy for you to remit income, withholding or sales taxes.


Casual or regular Bitcoin users are also advised to establish and maintain a record-keeping system that helps them track bitcoin acquisitions and dispositions. Disposed bitcoins should be logged down on Schedule D and Form 8949. Keep in mind that every purchase made using bitcoins reflects two transactions in one go. One is a disposition and the other is expense.

You can also use software tools to track bitcoins. Some helpful apps are as follows:

  • LibraTax – a software that can trace bitcoins imported and calculates gains and losses.

  • BitcoinTaxes – web-based software known for calculating gains or losses and data imported.
  • PayByCoin – good for market investors who accept payment via Bitcoin and other digital money.


According to Tyson Cross, a lawyer expert on taxation and specializes on cryptocurrencies, every bitcoin deal can be taxed. Users will have to compute their gain or loss every time they buy items, services or commodities using bitcoin. Simply put, taxes are applied on properties considering these three moments in time: acquisition of property, hold of property, and disposition of property.


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