For a business of any size, the decision to accept payment in cryptocurrencies like bitcoin is a big one. Issues such as price volatility and custody have kept crypto payments in a fairly small niche.
But cryptocurrency payments are becoming more popular as bitcoin and other digital assets become more common, crypto-focused payment processors make it easier to set up point-of-sale tools, and payment cards Mastercard and Visa branded debits issued by cryptocurrency exchanges and other companies allow merchants to accept payment in crypto rather than simply converting it to fiat as part of the transaction.
From a tax standpoint, however, accepting cryptocurrency payments remains an obscure issue, as virtually all rules regarding the taxation of cryptocurrencies remain unwritten.
This means you should know that nothing you hear from your accounting and finance department, read in this article or even see in IRS guidelines in FAQ format, is certain. A look at the politics surrounding cryptocurrency regulation suggests that stricter regulation will be in place by next April.
But for now, there are a few things you need to know if you’re considering accepting cryptocurrency as a form of payment, and you need to know if you’ve done so.
Every cup of coffee
First and foremost, every cryptocurrency transaction is a taxable event. It seems pretty simple and obvious, until you dig into it.
The biggest problem is that the IRS considers cryptocurrency to be “property” for tax purposes. This means that it should be valued at its price on the day it was received and sold. So whenever you accept cryptocurrency, you — and your customers — are subject to capital gains tax, the U.S. Chamber of Commerce recently noted.
“You should keep track of the value of each cryptocurrency on the day it was received and the day it was sold,” Chamber said in a blog post in September. “It can get complicated quickly, especially when you’re dealing with multiple transactions a day.”
If this gives you the impression that you and the customer are subject to capital gains tax on every cup of coffee sold, well, that becomes the standard example.
And while that’s a potentially unexpected and daunting challenge for the consumer, it’s even worse for the business, according to accounting and consulting firm Weaver.
“Those with significant transaction activity will be burdened with heavy documentation and data maintenance requirements,” he said during a webinar in January.
Add to this that the value of cryptocurrencies can swing wildly in a day – the price of a bitcoin regularly changes by thousands of dollars within hours – and you have a complex calculation.
This is something a crypto-focused payment processor can help with. BitPay, for example, will issue Form 1099-Ks for most business customers that “equate all settlements to the USD value at the time of invoice creation.”
Then there is the question of whether you pay long-term or short-term capital gains tax, which depends on whether or not the cryptocurrency is held for a year or more.
US House advice: “Consider accepting cryptocurrency for items of a certain dollar value, rather than daily sales.”
What East this?
Weaver noted that the burden could become more complex as different cryptocurrencies are classified in different ways as the legislative process moves forward.
This refers to the fact that different US regulators and agencies have different opinions on how cryptocurrencies should be classified.
For example, Securities and Exchange Commission (SEC) Chairman Gary Gensler said he believes virtually all cryptocurrencies are securities, while Commodity Futures Trading Commission Chairman Rostin Behnam said many would be classified as commodities, complaining in a recent Senate hearing that there is a ‘significant gap’ under the law between ‘what constitutes a security and what constitutes a commodity’ .
Read more: In Senate Hearing, CFTC Chairman Behnam Escalates Battle With SEC Over Crypto Oversight
The States Cup
And don’t forget the question of how to treat the acceptance and sale of cryptocurrency for state sales tax purposes as well.
In a November article with a state-by-state guide, Bloomberg Tax noted, “The majority of states have yet to issue guidance on the tax treatment of virtual currency or cryptocurrency” with respect to the sales tax.
California treats cryptocurrencies as cash equivalents, subject to the same tax rules. Kentucky does the same, but “requires sellers accepting bitcoin as payment in a taxable transaction to convert the bitcoin to US dollars and charge Kentucky sales and use tax,” he said.
Kansas, on the other hand, “does not subject digital currencies like Bitcoin to sales and use tax.”
An interesting piece of recent crypto tax news is that Colorado plans to accept tax payments in crypto, which would presumably be a taxable event.