Buying a Tesla with bitcoin could come with a hefty tax bill

• Elon Musk announced Wednesday that Tesla would start accepting bitcoin as payment for its cars.
• Early bitcoin investors that use the cryptocurrency to buy a car could pay thousands in taxes.
• The capital gains tax treats bitcoin purchases similar to selling stocks or other assets.

Using Bitcoin to buy a Tesla - as is now an option, CEO Elon Musk announced this week - could come with all kinds of complications, including a hefty tax bill.

Purchasing one of the electric cars with bitcoin could end up being more expensive than buying in cash or on credit, depending on when a customer first acquired their share of the cryptocurrency. That's because the Internal Revenue Services sees spending bitcoin - or even converting it back to US dollars - as a realization of investment gains, and therefore subject to the capital gains tax. It's not unlike selling a stock or bond.

The amount of tax a person will have to pay on a transaction involving bitcoin depends on how long they've had the cryptocurrency and how much it gained in value since it was bought.

IRS rates for capital gains taxes on assets that have been owned less than a year are taxed in the same brackets as a person's other income, while long-term capital gains are taxed at 15% for individuals who earn between $40,000 and $441,000 - and 20% for individuals that make more than that amount.

For investors that bought into bitcoin early, using the digital currency to buy a Tesla car could be very expensive. Even those who bought bitcoin a year ago - when it was valued at about $6,500, or almost one-tenth of today's prices - would be paying almost as much as their initial bitcoin investment in taxes just from buying one of Tesla's cheapest vehicles. That's on top of any additional sales taxes in the purchaser's state.

On the other hand, the bitcoin purchase could present a tax break for more recent bitcoin investors. If an investor bought bitcoin this year at a higher price than its current value, the individual could report a loss and receive a tax deduction for the following year.

Tesla car prices range from $39,000 for the Model 3 to over $80,000 for the Model X, according to Tesla's site.

In Tesla's bitcoin terms and conditions, the company highlights several risk factors associated with using bitcoin as a mode of purchasing its electric cars.

The purchases are not set at static bitcoin prices, but rather a bitcoin equivalent to the price of the car in US dollars given by Tesla at a certain time and only valid within a time period set by Tesla. Due to the volatility of bitcoin, any Tesla returns would be a gamble, as the company would return the payment in the form of bitcoin - a risk Tesla highlights in its terms and conditions.

"The price of Bitcoin can be volatile and subject to upward and downward movements," the statement reads. "If we refund you in Bitcoin, the value of such amount of Bitcoin relative to U.S. dollars might be significantly less than the value of such amount of Bitcoin relative to U.S. dollars at the time of purchase."

Bitcoin purchases are irreversible, so any error in the initial transaction would be at the customer's own loss. The buyer will also be subject to bitcoin network fees which have spiked to as much as $60 in the past.