Using Bitcoin to buy a Tesla? Get ready to hear from the IRS

If you got rich buying Bitcoin a year ago, Elon Musk is inviting you to purchase one of his cars with some of the proceeds. The taxman will be watching if you do.

That’s because cashing in the digital asset for a shiny, new Tesla will count as realizing a capital gain. Say you bought into crypto a year ago, when Bitcoin was trading at about $6,500. Spending around $38,000 to buy the new Tesla Model 3 would mean cashing in a gain of $31,500 — and that’s on the cheaper end of the spectrum for the electric vehicle. At the current rate on capital gains, that’s a $4,750 or so tax bill you’ll have to foot — or almost as much as the amount you paid for your original Bitcoin.

This applies to any transaction made that converts Bitcoin into a physical asset. The IRS — which began asking crypto users to disclose transactions on their 2019 individual tax returns — asks taxpayers whether they “received, sold, sent, exchanged or otherwise acquired any financial interest in any digital currency.”

SeongJoon Cho/Bloomberg

The inverse is also true. If you bought the token when it peaked at around $61,000 earlier this month and don’t want to hold on, converting part of it to a Model 3 would give you a tidy tax deduction next year.

— With assistance from Ed Ludlow