Bitcoin and other types of cryptocurrency have officially moved out of the tech fringe and into the mainstream, which means this currency is now taxable. If your portfolio includes cryptocurrency, understanding how the government treats these assets for tax purposes will help you avoid expensive bills and fines. As tax season approaches, prepare by learning more below.

How Is Cryptocurrency Taxed?

Under the IRS’ official guidelines, cryptocurrency is considered a capital asset, which is anything used to transfer value. In this respect, it isn’t very different from stocks, real estate, or any other asset in your portfolio. If you make money because of your Bitcoin purchase, you’ll be taxed on the profits. Likewise, any losses can be deducted on your returns, lowering your tax bill.

How Are Different Gains Taxed?

Long-Term Gains

If your cryptocurrency appreciates over time, the gains will be subject to capital gains tax at the end of the year. This is the best position to be in, since the capital gains tax rate is either 15% or 20%, depending on your income. If you make less than $38,600 per year, you could owe nothing.

Short-Term Gains

If you buy cryptocurrency and sell it in less than a year, the IRS treats the appreciated value like any other income—the amount will be added to your gross revenue and taxed according to your bracket. So, if you’re subject to the 22% tax bracket and you make $1,000 on Bitcoin you bought four months ago, you’ll owe $220 in taxes.

How Are Sales Taxed?

If you use Bitcoin to buy something, that's considered a sale, since cryptocurrency isn’t recognized as legal tender. Even if the vendor accepts cryptocurrency directly, a transaction is the same as selling the asset and using the money to buy something. These transactions are subject to the same tax rules that govern short- and long-term capital gains, depending on how long you've held the cryptocurrency.

If you're a cryptocurrency investor who isn’t sure how to claim those assets on your return, contact ZP Tax, Inc. From their office in Silver Spring, MD, these professionals help taxpayers throughout the area get their taxes done correctly the first time. Visit their website to learn more about their cryptocurrency expertise, or call (301) 587-4829 to get started on your tax returns.