At the beginning of 2017 Bitcoin was trading at $968. During the year it grew to a high of $19,783. News stories sparked many to ask, "Should I invest in Bitcoin?" More recently Bitcoin's price had dropped back to $6,511 and the interest subsided.
For some users, Bitcoin is a way to avoid government intrusion and illegally evade paying taxes. Most Bitcoin owners, however, want to comply with IRS regulations.
The IRS classifies all cryptocurrencies as property. Buying Bitcoin is not a taxable event. But using Bitcoin to buy something else is considered a sale of Bitcoin and selling property for more than you purchased it for is a taxable event. If you "sell" some Bitcoin at a profit that you purchased within the last year, you will have to report short term capital gains on your tax return and pay ordinary income tax rates. If you sell a trade lot that you have held at least a year, you may only have to report long term capital gains which are taxed at a lower rate.
Selling Bitcoin at a loss will generate short or long term capital losses which can be used to offset capital gains. But buying any Bitcoin within 30 days before or after selling Bitcoin for a loss may generate a wash sale and then the loss must be folded back into the purchase.
The IRS relies upon the taxpayer to correctly track and pay tax on Bitcoin and other crypto currencies. Even if the IRS doesn't know about your Bitcoin activities you are still responsible for complying with the tax code.
Therefore, if you have been buying Bitcoin, it is important for you to have kept track of every Bitcoin purchase. Each purchase is considered a trade lot. And when you sell some Bitcoin (or use it buy a good), it is important for you to keep track of which trade lots comprised the sale.