Bitcoin and other digital currencies have increased in popularity in recent years. The number of people holding Bitcoin is now in the millions, and many online retailers, such as Dell, Microsoft, and Overstock.com are now accepting the currency as payment for goods and services.

Bitcoin Basics: Bitcoin is an electronic medium of exchange in which coins can be acquired in three ways; mining, purchasing them or receiving them as payment for a product or service. The value of Bitcoins in U.S. dollars has fluctuated wildly since its inception; in 2014 for example, the currency was worth $748 at the start of the year and ended the year worth only $317.

For tax purposes, the IRS classifies Bitcoin as a property rather than a currency. This means it is more like holding shares of stock in a company. For example, if you purchase Bitcoin at $500 and sell it (or use it to purchase a good or service) at $600, you would need to pay capital gains taxes on the $100 increase in value at the time you sold or spent it.

This can become quite complicated for people who mine or acquire Bitcoin in small amounts and use them frequently for purchases. They would need to keep track of the value of each coin acquired as well as the value when sold or used for a purchase. For those in this situation, it can be difficult to track which coins were used for which purchases.

Another complication is that the IRS has a different income classification for Bitcoin miners. For those that mine their Bitcoins, the value of the coins at the time of the mining is considered income. Of course, miners are also allowed to deduct expenses incurred when calculating their net income from the process. Later they would realize a capital gain or loss depending on the value when it is sold or used for a purchase. If you do end up with a capital gain at the end of the tax year, you will need to report it on a Form 8949.

Trading in digital currencies such as Bitcoin may be an exciting and profitable venture, but don’t forget the (often complex) tax implications. If you need help accurately calculating your Bitcoin taxes, speak with a local accountant.