Elon Musk revealed late Tuesday that Tesla is officially starting to accept bitcoin as payment for its vehicles in the US.
The move, which Musk first announced a month and a half ago, is a major development in the cryptocurrency world. Investors who have watched bitcoin’s rally in recent months can now trade their crypto for one of the hottest cars on the market.
But exchanging bitcoin for a Tesla isn’t as easy as putting down a credit card. There are major tax implications for buyers – particularly those who invested in bitcoin early and have seen their holdings grow exponentially since then.
In fact, buying a new Tesla with bitcoin can end up being much more expensive than buying a Tesla with cash.
That’s because in the eyes of the Internal Revenue Service (IRS), spending your bitcoin isn’t all that different from selling it, and if you sell it, it’s subject to capital gains tax.
The IRS classifies bitcoin and other cryptocurrencies as ownership, so when you sell it or exchange it for a product, you have to pay tax on the increase in value, similar to when you sell stock.
If you bought one bitcoin for $ 3,000 last March and then used the same coin – now over $ 50,000 – to pay for a Tesla this week, you’ll need to report capital gains on the transaction.
“What you have there is a capital gain of $ 47,000,” Ryan Losi, a chartered accountant (CPA) at Piascik, told CNBC Make It. “The IRS is going to look at the currency’s fair value on the date of exchange and compare that to your tax base, the date the bitcoin was acquired.”
The amount of tax you pay on the transaction depends on how long you held the bitcoin. If you owned it for more than a year, you will pay a long-term capital gains tax rate on your profits, which is determined by your income. For single filers, the capital gains tax rate is 0% if you earn up to $ 40,000 per year, 15% if you earn up to $ 441,450, and 20% if you earn more. This IRS worksheet can help you do the math.
If you have owned your crypto for less than 12 months, you will pay short-term profit rates, which are equal to your normal income tax rate.
That means, unless you’re making less than $ 40,000 a year, you can expect at least 15% tax on your new Model 3.
Checking out: Do you owe tax on your bitcoin? The answer depends on when you bought and sold
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