Digital Currencies and Taxes

It’s hard to tell what causes the price of bitcoin to rise and fall, because there are no fundamentals attached to the currency. This article explores the idea that capital gains taxes are the major reason for bitcoin’s recent decline. It says many bitcoin investors didn’t realize that the IRS will tax their profits as capital gains, so they’re selling more bitcoin to pay the taxes on last year’s profits.

“I see people that bet the farm on it,” said Vincenzo Villamena, founder and CEO of OnlineTaxman.com. “They’re stuck with a large tax bill and they’re doing payment plans, or they’re selling off crypto.”

The IRS announced in 2014 that it would treat bitcoin and other cryptocurrencies as property, not currency. When you buy and sell bitcoin in the same year, it doesn’t matter if it’s traded into real money or “alt-coins,” it’s a taxable event, Villamena said. Those trades count as short-term capital gains, which can be taxed at as high as 39 percent depending on your bracket.

Bitcoin mining and airdrops (which are gifts of cyrptocurrency given by developers to drum up interest) are also taxed, but count as ordinary income, where the rate also depends on your tax bracket.