Potential Buyers Divided on the Wisdom of Spending Bitcoin on a Tesla

Tim Alper
Last updated: | 4 min read

The taxman “will be hovering with palms out” should American customers decide to take up Elon Musk’s offer of buying one of Tesla’s cars using bitcoin (BTC), observers have pointed out – with capital gains and income tax levies a possible deterrent for would-be crypto-paying customers.

Source: Adobe/Moose

CNBC reported that there was a “twist” to the tale of Telsa’s ground-breaking move – in the shape of the Internal Revenue Service (IRS).

As a reminder, when an individual uses bitcoin to buy goods or services, they “are in effect selling that cryptocurrency.”

The IRS, per the report, “treats bitcoin and its brethren as property whose sale comes with either a gain or loss depending on whether it is worth more or less than when you acquired it.”

This fact has already led many BTC users to debate whether – theoretically speaking in many cases – it would be advantageous to buy a new Tesla now or wait in the hope that BTC prices climb higher, perhaps reaching the USD 100,000 mark.

The same media outlet quoted Garrett Watson, a senior policy analyst at the Tax Foundation, as stating,

“It’s really important to know the cost basis of any cryptocurrency – the value when you bought it – and the timing of that. That’s going to determine how much is subject to tax and what tax rate you’re paying.”

Watson added that capital losses elsewhere could provide “a way to minimize your net tax bill” for concerned potential bitcoin-paying buyers.

However, timing appears to be everything when it comes to spending BTC on cars without the taxman throwing a spanner into the works.

If an American buyer wanted to use bitcoin holdings they had been in possession of for under a year, “any increase between its value when you bought it and when you use it to make a purchase is considered a short-term gain and would be taxed at ordinary income tax rates,” CNBC explained.

Those rates currently vary and can be as low as 10% and as high as 37%, depending on a person’s total income.

The problem is that other income and the size of short-term gains could suddenly move people into a higher tax bracket.

Bloomberg, meanwhile, gave the following example:

“Say you bought into crypto a year ago, when bitcoin was trading at about USD 6,500. Spending around USD 38,000 to buy the new Tesla Model 3 would mean cashing in a gain of USD 31,500 – and that’s on the cheaper end of the spectrum for the electric vehicle. At the current rate on capital gains, that’s a USD 4,750 or so tax bill you’ll have to foot – or almost as much as the amount you paid for your original bitcoin.”

On Twitter, Coin Tracker’s Head of Tax Strategy Shehan Chandrasekera had an (unwelcome) three-letter answer in the affirmative to a Bloomberg contributor who had asked:

“So if someone bought a bitcoin last year and is sitting on a 10x return, and then buys a Tesla with it, do they have to pay short-term capital gains taxes on that transaction?”

Chandrasekera also responded to Musk’s tweet yesterday that made note of the fact that Tesla would not seek to convert any BTC payments it receives into cash, opining,

“Retaining BTC without converting it into cash has no benefit to the buyer. If you spend BTC to buy a Tesla, you will have to pay capital gains taxes on the difference between how much you paid for the coin and the market value at the time of spending.”

And the Coin Tracker executive suggested Tesla should have gone a step further to prove its true commitment to the crypto space, writing, that “What would be really cool [would be Musk] pricing Teslas in BTC. No matter how much the USD price of BTC, you always pay X amount of coins. This is the real adoption.”

On Reddit, meanwhile, multiple threads devoted to the news saw users debate the virtues or otherwise of spending BTC on a Tesla.

One suggested that buying a Tesla “with bitcoin instead of cash” would “ensure the bitcoin is off the market.”

However, not everyone agreed with this strategy, with one answering sarcastically,

“Give away the best performing asset of the 21st Century to buy a car that depreciates the minute I drive it off the dealership lot. Great advice my friend.”

Others suggested that it would be “dumb” to take up Musk’s offer as “someone buying a Tesla with bitcoin could overpay by 50% within a few days of the purchase” considering the sort of price volatility the token has experienced of late.

One Redditor came up with an innovative, tongue-in-cheek solution, writing:

“I’m gonna sell a duct-taped banana NFT for USD 100k and buy a Tesla with that.”

Whether this strategy would throw the IRS off the scent or not, however, appears to be up for debate, as Chandrasekera told CNBC earlier this month.

At the time of writing (09:05 UTC), BTC trades at USD 52,620 and is down by almost 7% in a day and 11% in a week. It’s also down by 3% in a month, trimming its gains over the past 12 months to 684%.

Learn more:
The G7 Taxman Is Coming for Your Crypto Profits
Idea Of Taxing Unrealized Gains Resurfaces As Money Printing Intensifies
Crypto and Tax in 2021: Be Ready to Pay More
IRS Updates Instructions To Tax Individual Crypto Investors
Bitcoin & Crypto Taxes In US: When to Sell and When to Hodl
Japanese Crypto Tax Evader Hit with Year-long Jail Sentence