Bitcoin as a Currency
Tax Treatment: If Bitcoin were treated as a currency, gains or losses from its exchange would be taxed at ordinary income rates, similar to foreign currency transactions. This means that no matter how long you hold Bitcoin, you would pay your marginal income tax rate on any gains, which can be as high as 37% on federal taxes. This treatment is less favorable for long-term investors.
Bitcoin as a Commodity
Tax Treatment: The IRS treats Bitcoin and other cryptocurrencies as property for federal tax purposes. This means that any gains or losses from the sale or exchange of Bitcoin are subject to capital gains tax, similar to stocks or other investments. The tax rate depends on the holding period:
Short-Term Capital Gains: If you hold Bitcoin for less than a year, gains are taxed at your ordinary income tax rate.
Long-Term Capital Gains: If you hold Bitcoin for more than a year, gains are taxed at a lower rate, which can be 0%, 15%, or 20% depending on your income bracket.
