Recently, Elon Musk announced that purchasers of Tesla may buy one with their Bitcoin. But be aware that the IRS is watching. If you purchase a Tesla with Bitcoin, and you bought the Bitcoin at a price lower than the cost of the Tesla, you will incur capital gains tax on your new purchase. For example, if you bought your Bitcoin at $20,000 and use it to buy a new Tesla at $55,000, then you have a gain of $35,000 subject to capital gains tax. This is because you, in effect, exchanged property worth $20,000 for property worth $55,000 and had an “accession of wealth” equal to $35,000. The IRS characterizes cryptocurrency as “property” and this always carries tax ramifications when property is exchanged for other property of a higher value.