How Tesla Purchases Via Bitcoin Could Be Taxed By The IRS

Tesla launched its Bitcoin payment option on Tuesday, marking another milestone for the company. While paying for electric cars with Bitcoin is an exciting idea, Tesla’s cryptocurrency transactions will have some tax ramifications.

CNBC reported that Teslas bought with Bitcoin may have “heavy tax burdens” associated with it. The Internal Revenue Service (IRS) treats virtual currency in the United States as property for federal tax purposes, pursuant to Publication 544. Therefore, capital gains taxes apply to the purchase of Tesla vehicles purchased with Bitcoin. However, the amount a person is taxed may differ and depend on when they bought their bitcoin.

Elon Musk, CEO of Tesla, stated that the company will only use internal and open source products [sic] Software for the direct operation of Bitcoin nodes. “Bitcoin paid to Tesla will be retained as Bitcoin and not converted into fiat currency,” Musk explained on Twitter.

Pay-by-Bitcoin feature available outside of the US later this year

– Elon Musk (@elonmusk) March 24, 2021

Exchanging bitcoins for a Tesla without converting it to fiat currency can make the calculation of capital gains tax a bit confusing. Due to the changing value of Bitcoin, taxpayers can report gains or losses when using the cryptocurrency to purchase a Tesla.

Bitcoin was trading at $ 6,500 a year ago and the current price for a Tesla Model 3 is $ 38,000. A person “trading” their bitcoin asset from last year for a Tesla Model 3 would now make a cash gain of $ 31,500. Bloomberg calculates that such a person would owe the IRS a tax bill of $ 4,750 for their purchase of the Tesla Model 3.

However, the opposite could also happen. Bitcoin is currently priced at around $ 52,000. If a person exchanges $ 52,000 worth of Bitcoin for a Tesla Model 3 worth $ 38,000, they can report a loss, which could result in a possible tax deduction the following year.

Although Tesla does not convert the Bitcoin received as a payment into fiat currency, it does charge customers the corresponding value in US dollars for its vehicles.

“If you want to make a payment using Bitcoin, you must pay an amount of Bitcoin that is equal to the US dollar purchase price of the product you purchased. We will provide you with a US dollar price for the product or service you are purchasing and an equivalent bitcoin value (the “Bitcoin Price”), ”states Tesla in the Bitcoin Payment Option Terms and Conditions.

It goes on to say: “You must arrange for the Bitcoin price to be transferred to us within the period of time that we make available to you together with the Bitcoin price (the“ Bitcoin price window ”). If you do not initiate the transfer of the Bitcoin price to us within the Bitcoin price window, the Bitcoin price will expire and we will provide you with a new Bitcoin price and Bitcoin price window upon your request. “

To learn more about how capital gains tax is calculated on your Tesla, click here or watch the video below.

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