According to a recent memorandum from the NY State Tax Agency’s Taxpayer Guidance Division on December 5th, 2014 classified cryptocurrencies as a type of ‘intangible property’ and consequently they are not subject to a sales tax when purchased.
The memorandum states that a sales exchange involving a cryptocurrency is considered as a type of barter transaction. Under the definition, only certain goods and services exchanged for a cryptocurrency are subject to a sales tax or related reporting requirements.
The document contains several examples summarizing how one party may, or may not, be required to pay and report sales taxes when a cryptocurrency is involved:
“…if the party that gives convertible virtual currency in trade receives in exchange goods or services that are subject to sales tax, that party owes sales tax based on the market value of the convertible virtual currency at the time of the transaction, converted to US dollars. If the party that trades property or services in exchange for receiving convertible virtual currency gives the other party a sales slip, invoice, or receipt, the first party must separately state the sales tax due in US dollars on the sales slip, invoice, or receipt.”
Marco Santori, a counsel at law company Pillsbury Winthrop Shaw Pittman and a chairman at Bitcoin Foundation, was among the first who shared the news:
Great news: #bitcoin is now "intangible property," so sales of BTC not subject to sales tax in NY. First affirmative statement on this.
— Marco Santori (@msantoriESQ) December 9, 2014
The memorandum appeared months after the U.S. IRS (Internal Revenue Service) issued its initial guidance on taxing bitcoin as a type of property in March 2014.
Looking back, according to the IRS notice, general tax rules that apply to property transactions are also applicable to transactions using cryptocurrency.
Given the treatment of cryptocurrency as a property, the bartering taxation could be a good example to see how the property taxation works. If someone is paid for work with a car as a barter, its price compensates the services. The amount of value becomes the basis of the car. If the car is then traded for another item, the second trade is a taxable transaction.
Cryprocurrency wallets include bitcoins from transactions with different basis and the amount of each basis will be different too. A taxpayer may not be able to identify each bitcoin or correctly define the basis.
After correctly determining the basis, it is necessary to analyze the value of each transaction made with the use of cryptocurrency. There is no doubt that the accounting will be challenging if use the cryptocurrency for daily purchases in a large number of places.
Furthermore, the bitcoin users must take into account other issues in accordance with IRS:
- Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
- Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
- The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
- A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.