Final answer:
Jeremiah has a $1,500 short-term capital gain from using appreciated Bitcoin to purchase a watch, which he needs to report as taxable income on his tax return using IRS Form 8949 and Schedule D.
Step-by-step explanation:
In the situation provided, Jeremiah needs to address the implications of using Bitcoin—a cryptocurrency considered as property for tax purposes by the IRS—to make a purchase. The original conversion of $2,000 into Bitcoin in November 2021 serves as the base cost or cost basis for tax calculations. When he used the appreciated Bitcoin value of $3,500 to purchase a watch in October 2022, it triggered a taxable event. The increase in value from the cost basis ($2,000) to the market value at the time of the purchase ($3,500) represents a capital gain.
In Jeremiah's case, the capital gain would be $1,500 ($3,500 - $2,000). This gain is subject to capital gains tax and must be reported on his tax return. The specific tax rate depends on whether the gain is considered short-term or long-term. Since the holding period in this case is less than a year (November 2021 to October 2022), the gain is classified as short-term and is taxed at ordinary income tax rates. Jeremiah will need to use the appropriate tax forms to report this transaction—typically, this would be reported on IRS Form 8949 and Schedule D of his tax return.