First, it’s important to know that you won’t sound off the IRS alarm if you purchase Bitcoin from a cryptocurrency exchange and hold it.
Under U.S. tax law, Bitcoin is deemed as property instead of currency. That means the profits on your Bitcoin are subject to capital gains taxes. These taxes are only applicable when you realize the gains in your account. In other words, you don’t have to worry about taxes until you dispose of your Bitcoin.
Let’s say you bought some Bitcoin for $13,000 and that three months later, the value of that Bitcoin had risen to $20,000. That’s a $7,000 unrealized gain because you have not sold your Bitcoin. You can’t officially lock in gains until you sell and obtain the benefits of the growth in your account.
So, there’s no need to write a check to the IRS when you buy Bitcoin and your portfolio grows. You’ll only need to dive into capital gains taxes on your Bitcoin investment when you buy at one price and sell at a higher price, leading to income in your account because of your decision to sell. This is exactly how gains on stocks work.
You’ll trigger taxes when you sell or convert Bitcoin
As long as you hold your Bitcoin, you won’t owe any cash to the IRS. But if you decide to sell or exchange Bitcoin for another cryptocurrency, you need to prepare to report these transactions on your tax return and potentially pay taxes.