The topic of bitcoin regulation is certainly not new. As the crypto-currency has gained increased notoriety around the world, more and more countries have stepped up to the plate and offered their take regarding how the virtual currency should be treated in terms of regulation, and in particular, taxation.
Most recently, the Internal Revenue Service of the United States put their two cents in regarding how bitcoin will be handled for taxation purposes moving forward.
In a nutshell, according to the IRS, bitcoin is taxable. As reported by the most recent notice released by the IRS, "In general, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability." 1
What exactly does this mean? According to a report released by Bankrate, 2 what the latest notice from the IRS actually means is that it is going to treat bitcoin like property rather than currency for the purposes of taxes. In its notice, the IRS did acknowledge that virtual currencies operate in a manner that is "like" currencies. The IRS even went on to state that virtual currencies can be used for the purposes of buying and selling services and goods. With that said, the IRS stressed that virtual currencies, like bitcoin, are not accepted as "legal tender" by any country.
What exactly does this mean to you if you own a small business? What does it mean to you if you use bitcoin to pay for goods and services? The matter can certainly be confusing. Business News Daily 3 reports that bitcoin sales tax is one of the four most common issues misunderstood by businesses. The matter becomes even more significant as an increasing number of e-commerce and even brick and mortar businesses begin to explore bitcoin as an option for payment, primarily due to the easy checkout experience it offers and low transaction fees. Even so, as Business News Daily reports, there are special tax implications that should be kept in mind by business owners who are considering accepting bitcoin as a form of payment.
Essentially, merchants who make the decision to collect funds for sales in bitcoin are still required to abide by state and federal laws regarding income and sales tax. Where the subject gets tricky is the fact that bitcoin is not accepted by the federal government for tax remittance purposes. Therefore, business owners have a responsibility to calculate and then exchange the bitcoin they collect in sales for U.S. dollars prior to filing taxes.
This will naturally entail extensive record-keeping on the part of users to ensure that they remain compliant with all tax guidelines. According to a report published by Bankrate, every transaction involving bitcoin is taxable. Under the ruling issued by the IRS, employees who receive bitcoin as payment would be required to report those wages on a W-2.
Taxpayers also have their own share of responsibilities when it comes to the use of bitcoin. For instance, taxpayers would have a responsibility for reporting the fair market value of any virtual currency they receive in exchange for goods or services. That market value would be defined according to the equivalent dollar value on the day on which the virtual currency was received.
Bitcoin miners must also take care to ensure they are in compliance by including the value of the virtual currency mined in their gross income statements, as well. In the event that mining is considered a business, the individual will also be required to pay self-employment tax.
There are some advantages associated to the IRS treating bitcoin as property. For instance, according to Bankrate, consumers are able to benefit from long-term capital gains, an advantage that would not be possible if bitcoin had been labelled as a foreign currency.
It should be noted that the decision by the IRS went into effect immediately. It is also retroactive and includes any past transaction that may have been made with the use of virtual currencies. Even so, the IRS has says that "penalty relief" may be available to individuals who are able to demonstrate reasonable cause regarding why they did not properly file tax returns or under filed tax returns.
Currently, the IRS and the Treasury Department are soliciting comments regarding other aspects related to transactions involving virtual currencies that may be addressed in guidances issued in the future.
Without a doubt, laws and regulations regarding the use of bitcoin will continue to evolve. As a result, it will be necessary for merchants as well as users of bitcoin and other virtual currencies to ensure they follow such developments closely to ensure they avoid any potential audits or penalties.
2) Bankrate. IRS says bitcoin is taxable property.
3) Business News Daily. 4 Confusing Tax Issues Small Businesses Often Misunderstand.