Do not make transactions with Bitcoin until changes have been made to the tax code: Ark Investment Founder

Cathie Wood, the founder of Ark Investment Management, advised against Bitcoin investors this week against using their holdings for transactions.

Under current U.S. tax law, investors must pay capital gains taxes not only when converting their cryptocurrency to fiat, but also when using cryptocurrencies to pay for goods or services. While it is now possible to buy a Tesla with Bitcoin, users need to know the taxes they could potentially face.

Cathie Wood. Source: Bloomberg

What to do with profits

Earlier this week, Tesla founder Elon Musk announced that the electric car maker would accept Bitcoin as a payment method for its vehicles. Since Bitcoin’s last bull run, billions of dollars have been made in the cryptocurrency space, making many people very wealthy. It may be a brilliant move by Elon, those who have achieved great success, to enable the purchase of real goods with their digital wealth, but there is cause for concern for investors looking to buy the latest Tesla.

Cathie Wood spoke to CBOE during a webcast Thursday about Bitcoin investors using their profits to transact. These comments came shortly after Tesla announced the announcement. While Bitcoin was originally conceived as a peer-to-peer e-cash system, it may not be the best idea to use it for transactions right now.

“The IRS has something to say about this. So if you are making huge profits on your Bitcoin, I probably wouldn’t take the transactions much until we maybe get some changes on the tax front.”

Bitcoin as property

For the past several years, the IRS has considered Bitcoin “property” in the US. This means it falls into the same category as stocks or bonds along with any related taxes and regulations.

Just like buying and selling stocks, cryptocurrency investors must pay capital gains taxes on every sale. Tax rates vary based on how long someone has held an asset, with assets held for an extended period of time being taxed at lower rates.

However, this categorization of tax codes does not fit very well with the concept of a cryptocurrency. Bitcoin was originally intended to be transacted as a currency to buy everyday goods and services. Having to consider taxes when buying something with Bitcoin is extremely onerous and can deter most people from using it in the first place.

Selected image courtesy of Bloomberg

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