While you can’t use a cryptocurrency to pay your tax bill, the IRS does have rules that treat transactions with one
Last year was a momentous one for bitcoin. The cryptocurrency began the year at just under $1,000 and finished at just over $14,000, posting a whopping one-year gain of nearly 1,400 percent.
I can’t say if bitcoin and other cryptocurrencies such as litecoin, ethereum, bitcoin cash and ripple make for good investments. Nor can I tell you how the huge run-up in the prices will end (though Warren Buffett said Wednesday: “I can say with almost certainty that they will come to a bad ending”). But I can provide a few answers as to how the IRS treats transactions using virtual currency.
First, the agency has acknowledged that virtual currency, such as bitcoin, may be used to pay for goods or services, or be bought, held and sold as an investment. In some transactions, digital money operates like the real money of the U.S. and can be used as a medium of exchange.
The IRS also said virtual currencies don’t have legal tender status, meaning you can’t use one to pay your federal tax liabilities.
How does all of this apply to everyday transactions using cryptocurrency? Let’s go through a few common examples.