First of all, it is important to know that if you buy and hold bitcoin through a cryptocurrency exchange, you will not set off the IRS alert.
Under US tax law, Bitcoin is considered property instead of currency. This means that the profits on your Bitcoin are subject to capital gains taxes. These taxes only apply if you realize the winnings in your account. In other words, you don’t have to worry about taxes until you get rid of your Bitcoin.
Let’s say you bought bitcoin for $ 13,000 and three months later the value of that bitcoin had risen to $ 20,000. That’s an unrealized gain of $ 7,000 since you didn’t sell your Bitcoin. You cannot officially secure profits until you sell and take advantage of growing your account.
If you buy bitcoin and your portfolio grows, you don’t have to write a check to the IRS. The only time you need to dive into capital gains taxes on your Bitcoin investment is when you buy at one price and sell at a higher price, which will result in income in your account based on your decision to sell. This is exactly how stock gains work.
You raise taxes when you sell or convert bitcoin
As long as you hold your bitcoin, you don’t owe any money to the IRS. However, if you decide to sell Bitcoin or exchange it for another cryptocurrency, you need to prepare to report these transactions on your tax return and possibly pay taxes.