Elon Musk at a 2015 event to launch the new Tesla Model X Crossover SUV in Fremont, California.
Justin Sullivan | Getty Images News | Getty Images
You may know that you can now buy a Tesla with bitcoin.
Tesla CEO Elon Musk announced on Tuesday that it is now possible to buy Tesla vehicles in the US with bitcoin.
“You can now buy a Tesla with bitcoin,” Musk tweeted.
If the idea appeals to you, here’s a twist: the tax authorities float with their palms out.
When you use bitcoin to buy goods or services, you are essentially selling that cryptocurrency. And for tax purposes, the IRS treats bitcoin and its brethren like real estate whose sale involves profit or loss, depending on whether it’s worth more or less than when you acquired it.
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“It is very important to know the cost basis of each cryptocurrency – its value when you bought it – and its timing,” said Garrett Watson, a senior policy analyst at the Tax Foundation. “That’s going to determine how much is subject to tax and what tax rate you pay.”
Right now, one bitcoin is worth about $ 56,000, up from about $ 6,700 a year ago. Last month, Tesla announced that it had purchased $ 1.5 billion worth of bitcoin and would soon begin accepting bitcoin as a form of payment for its electric vehicles, with starting prices ranging from about $ 38,000 for a Model 3 to about $ 80,000 for a Model X, according to Edmunds.com.
If you were to use bitcoin that you have held for a year or less, any increase between its value when you bought it and when you use it to make a purchase would be considered a short-term gain and would are taxed at regular income tax rates, which range from 10% to 37%, depending on your total income.
Keep in mind that depending on your other income and the amount of the short-term profit, you could end up in a higher tax bracket. For example, if you had $ 40,000 in taxable income without the bitcoin transaction, the highest rate you pay for it would be 12%. If you added a $ 10,000 bitcoin profit to that, it would push you into the next tax bracket, which comes with a marginal 22% rate for earnings above $ 40,525.
On the other hand, if you owned the bitcoin for more than a year when you made the purchase, you would be taxed at long-term capital gains rates, which are either 0%, 15%, or 20%, depending on which tax bracket your income falls.
One way to lower the capital gains tax is to use other investment losses against it.
“If you have a loss of assets elsewhere, that’s one way to minimize your net tax bill,” said Watson.
If you have more losses than gains, you can generally use up to $ 3,000 per year to offset other income on your federal taxes and carry over additional amounts into future years.
Tesla has a place on its website that provides some details on how it will handle bitcoin purchases. The company did not respond to an email request for additional information.