The Techno King has spoken.
Elon Musk, CEO of Tesla Motors and billionaire technology enthusiast, announced this week that you can now buy one of his electric vehicles with Bitcoin.
While this may seem like a natural progression for cryptocurrency enthusiasts, there’s one catch: the IRS will want a bit of your coin.
Yes, that’s right, cashing in your crypto will cost you. Here, we’ll explain how that works and what you may need to do when you file your taxes this year or next.
How much will the IRS tax my crypto?
In the eyes of the government, Bitcoin and other cryptocurrencies are considered property. Just like stock or bonds and any other type of asset, when you sell and make a capital gain, you owe the IRS a share on your taxes.
Using Bitcoin to purchase goods or services (like a Tesla) is essentially selling your cryptocurrency. If your coin is worth more than when you bought it, you’ve made a profit.
And like any short-term gains, your profit will be taxed at the ordinary income tax rate, which ranges from 10% to 37%, depending on your income.
Where you want to be especially careful is when spending bitcoin that’s appreciated enough to push you into a new tax bracket.
Let’s say you have a taxable income of $40,000 before you factor in your Bitcoin sale. You’re now paying a 12% tax rate. If you make another $15,000 from your Bitcoin sale, you’ll move up to the next bracket, increasing your taxes to 22%.
At $40,000, even a $600 increase would bump you up to the next income tax bracket. That’s why it’s important to keep track of changes to tax rates when you wade into investing, whether that be trading on the stock market or buying Bitcoin.
I still want to buy a Tesla with Bitcoin
Honestly, we don’t blame you — what a great icebreaker at cocktail parties.
And you’re not alone. As interest in Bitcoin grows, more companies are beginning to accept the currency. In addition to Tesla, these major companies now take Bitcoin as payment:
One bitcoin is currently worth $56,000. When we’re talking about moving around that kind of money, we always suggest you consult with a professional financial adviser to ensure you have your ducks in a row when it comes to managing it.
And if you sold off some coin in 2020, you’ll want to be sure to include that in your return when you file your taxes before the May 17 deadline.
How to get trading in crypto
If Musk’s announcement has piqued your interest in Bitcoin and other cryptocurrencies, but you’re not sure how to get started, there are a number of investment apps with low to no commissions that can get you set up.
There is an app that will allow you to do fractional trading, meaning if you can’t afford $56,000 for one Bitcoin, you can buy a small piece of one share. And while you’re at it, you can buy fractional shares of Tesla on the app too.
But don’t forget about your taxes
After you’ve touched base with your financial adviser and started your crypto trading journey, you may start to see higher tax bills.
While there’s not much you can do about how much the IRS can claim from your income, there are other things you can do to offset the extra money owing.
Cut the cost of your debt. If you were a big plastic user even before the pandemic, you’ve probably long dealt with expensive interest. If interest (and paying interest on top of interest) is starting to weigh you down, it’s time to get your debt organized. Folding your balances into a single debt consolidation loan at lower interest will help you make what you owe more manageable — and get it paid off sooner.
Shrink your insurance bills. If you’re not driving as much because of the pandemic, your car insurance company may be willing to give you a discount on your rate. Is yours being stingy? That’s easy enough — just shop around for a better deal. And while you’re at it, keep the savings rolling and cut another few hundred off the cost of your homeowners insurance by comparing rates to find a lower price on that coverage.
Bring in a little extra income Have a hobby or special talent? Turn it into a side hustle to bring in extra income. You can also use an app that give you cash or gift cards for watching videos and taking surveys. There is even a free app that will reward you just for taking a photo of your grocery receipts.
Free up some funds in your current budget. By finding a few creative ways to cut back, you can possibly wring out another several hundred dollars from your monthly budget. For example, maybe it’s time to say permanently log off any streaming services or other monthly subscriptions you’re not actively using. And, download a free browser extension that will automatically scour for better prices and coupons whenever you shop online.