Virtual Currency and Your Business
by BarbaraWeltman, Guest Blogger
- Created: April 17, 2014, 11:49 am
Bitcoin is a digital currency now used as medium of exchange by more than 10,000 businesses. Last year Apple applied for a patent on iMoney, another form of virtual currency, so it’s likely that using virtual currency as another payment method is something to be considered. How does this impact your business? The IRS says that convertible virtual currency, which is digitally traded between users and can be purchased for, or exchanged into, U.S. dollars or other real or virtual currencies, is property, not currency. Here’s what this means for you.
Receiving payment in bitcoin
If you receive bitcoin as payment for goods or services, you’re taxable on this payment in the same way you’d be taxed if you’d received any other type of property. You must include in gross income the fair market value of the bitcoin on the date it is received. For example, if you are an independent contractor paid in bitcoin, its receipt is income, and it is also subject to self-employment tax.
Determining fair market value may not be so easy. If the virtual currency is listed on an exchange and the rate is set by supply and demand, then this rate — on the day it is received — can be used for fair market value. There are several exchanges for bitcoin; both the buyer and seller must be listed on the same exchange to give and receive payment in this virtual currency.
The customer may have a gain or a loss when making a payment to you; it all depends on his or her basis in the bitcoin. If this is less than the cost of the goods or services, then the customer has a gain. For example, the customer bought the bitcoin for $5 and used it to pay for your cupcake costing $7. The customer’s basis is $5 and effectively acquired property for $7, so there’s a $2 gain. If the opposite is true, then there’s a loss. Whether the gain or loss is capital gain or loss or ordinary gain or loss depends on the person (usually capital gain or loss unless the person is a trader in bitcoin) and not on what is being bought with the bitcoin. If the customer has a capital transaction, then whether it’s short-term or long-term gain or loss depends on how long the bitcoin was held (more than one year is long-term).
Using bitcoin as payment for employees
If you pay an employee in bitcoin, it’s treated as an “in-kind payment” and the fair market value of the payment subject to payroll taxes. This means you have to withhold income tax on the payment as you would for any other compensation made in property. And you must take the payment into account for FICA (Social Security and Medicare) taxes and FUTA (federal unemployment) tax. For withholding purposes, check with your payroll company if you use one or IRS Publication 15 for more on noncash wages.
Information reporting for bitcoin
The fact that you’re making payments in something other than money does not mean you’re relieved of reporting transactions to the IRS. Some information returns you may need to file or will receive:
- Form 1099-MISC if you pay an independent contractor in bitcoin and total payments for the year to this person are $600 or more. If you’re a contractor being paid in virtual currency, expect to receive a 1099.
- Form 1099-K if, as a merchant, you have more than 200 transactions totaling more than $20,000 for the year; the bitcoin exchange will issue this to you.
- Form W-2 if you pay an employee in bitcoin, regardless of amount.
Customers using bitcoin may have to complete Form 8949 to list all of their purchases with virtual currency and then transfer the total to Schedule D of Form 1040; the IRS hasn’t given guidance about this reporting. Once they learn about this onerous reporting (if this becomes the requirement), they may not want to do business using bitcoin.
As businesses adapt to changing technology, the tax law won’t be far behind. If you have particular questions about how bitcoin may impact your business, contact your tax advisor.
About the Author
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser's Small Business Taxes, J.K. Lasser's Guide to Self-Employment, and Smooth Failing as well as a trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and host of Build Your Business Radio. She has been included in the List of 100 Small Business Influencers for three years in a row. Follow her on Twitter: @BarbaraWeltman.
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