Hi ursa321. Thank you for joining us today.
Anytime that an individual converts a digital currency into any other asset or cash, this becomes a taxable event. In your case, this happens whenever you use Bitcoin to purchase something. This is taxed as a capital transaction, much like the selling of stocks, and you are only taxed on the gains (or losses).
To determine your cost basis (purchase price), the tax code is fairly flexible. The most common method is FIFO (First in First Out). This means that you keep track of each amount that was purchased and use the oldest purchases first in determining the cost basis. You are also allowed to use Last In First Out, average cost, or any other method you choose, as long as it remains consistent.
There are several online trackers such as Coinbase that automate this process.
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