Whether you've used bitcoin as an investment or as a currency, you owe taxes on it.
As far as Uncle Sam is concerned, bitcoin is not currency. It's property. That means whenever you buy something with bitcoin, it's two transactions, not one. What you're actually doing is selling a property (bitcoin) for a cash value and then using money from that sale to buy a product. So every single purchase you make with bitcoin has to be reported on your taxes.
For many, though, bitcoin is just an investment. If you've held those bitcoins for less than a year and sell them, that cash will be taxed as income. If you've held for more than a year, it's taxed as a capital gain — which could run 20 percent. Adding on transaction and accounting fees could raise costs to 60 percent, as was the case for one early bitcoin adopter.
But here's the problem: Almost no one reports this.
From 2013 to 2015, fewer than 900 people each year reported bitcoin transactions to the IRS. That prompted the IRS in 2014 to label cyrptocurrency as property back and to recently serve a summons to Coinbase. In it, the agency called for the records of over 14,000 users who have "bought, sold, sent or received at least $20,000 worth of bitcoin in a given year."
A federal court narrowed the scope of the summons but ultimately ruled in favor of the IRS. The tax status of those transactions is still unknown.
Moving forward though, there may be some relief. A bipartisan bill, "The Cryptocurrency Tax Fairness Act," was presented to Congress in September. It's seeking to create a tax exemption for cryptotransactions under $600.
Some remain hopeful for amnesty, but it looks like Uncle Sam is still poised to get a decent cut of the bitcoin action.