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Taxing Situation
Should Your Business Accept Bitcoin as a Form of Payment?
By Sean Wandrei
Cryptocurrencies, as a form of payment, have been around for many years. At first, cryptocurrency was used as pay- ment on the dark web or for other nefarious activities, due
to its anonymity. While cryptocurrency can still be used by bad actors, such as the recent ransomware attacks, it has gained a more widespread acceptance in business.
Currently, there are more than 6,000 cryptocurrencies in exis- tence. The most popular and first cryptocurrency, Bitcoin, was intro- duced in a theoretical white paper in 2008. Other popular cryptocur- rencies include Ethereum, Litecoin, and Dogecoin.
Many businesses are embracing cryptocurrencies and see the value of accepting it as a form of payment for goods and services. As with anything in business, though, this can lead to some tax issues that a company must be aware of before accepting payments and paying for goods with cryptocurrency.
There are a few things we need to cover before we begin. Cryp- tocurrencies are decentralized digital assets that use computer- generated cryptography as an encryption mechanism for security. Cryptocurrencies are built on the blockchain, which is essentially a distributed, decentralized public ledger. The blockchain, by its exis-
“While cryptocurrency can still be used by bad actors, such as the recent ran- somware attacks, it has gained a more widespread acceptance in business.”
tence, provides an immutable record that follows the coin wherever it goes, and parties conducting transactions do not need to reveal their identities.
To be able to trade or conduct business using cryptocurrencies, an individual or business needs to be on an exchange, such as Coin- base. An exchange allows the client to trade cryptocurrencies for other resources, such as other cryptocurrencies or U.S. dollars. The exchange is similar in concept to Venmo or PayPal, through which cash is exchanged electronically between parties. When a business receives payment for goods or services or pays for goods or services, it would be done on one of these exchanges.
What are the tax implications of accepting cryptocurrency as a form of payment? A notice issued by the IRS stated that virtual cur- rency (cryptocurrency) is property and not currency. This means, with said transaction, cryptocurrency must be tracked because there will be a recognized gain or loss for every transaction. Since crypto- currency is property, the gain or loss from disposing cryptocurrency will generally be a capital gain or loss similar to those that a taxpayer would have from buying and selling stocks.
When a business accepts cryptocurrency as a form of payment for goods, the business has ordinary income equal to the fair market value (FMV) of the cryptocurrency it received. This is no different than if a business accepted cash as the form of payment for the sale of the goods. When a business pays for goods with cryptocurrency, it has a deduction for those goods equal to the FMV of the crypto- currency it used to pay for those goods. Again, there is no differ- ence between paying for goods with cryptocurrency or cash in this transaction.
The difference between cash and cryptocurrency occurs in the change of value of the cryptocurrency
while it is held by the business. Since cryptocurrency is seen as property by
Bitcoin
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JUNE 23, 2021
ACCOUNTING & TAX PLANNING
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