When It Comes to Accepting Crypto in Payment, Taxes Are Very Taxing

cryptocurrency, payments, taxes, regulations

For a business of any size, the decision to accept payment in cryptocurrencies like bitcoin is a fraught one. Issues like price volatility and custody have kept crypto payments a fairly small niche.

But cryptocurrency payments are becoming more popular as bitcoin and other digital assets go more mainstream, crypto-focused payments processors make setting up point-of-sale tools easier, and Mastercard- and Visa-branded debit cards issued by cryptocurrency exchanges and other businesses allow merchants to accept payment in crypto rather than simply converting it to fiat as part of the transaction.

From a tax perspective, however, accepting cryptocurrency payments is still a murky issue, as virtually every rule about taxing cryptocurrencies remains unwritten.

That means be aware that nothing you hear from your accounting and finance department, read in this article, or even see in FAQ-formatted IRS guidance, is certain. A look at the politics around cryptocurrency regulations makes it likely that firmer regulation will be in place by next April.

But for now, there are a couple of things you should be aware of if you’re thinking about accepting cryptocurrency as a form of payment, and need to know if you have been doing so.

Every Cup of Coffee

First and foremost, every cryptocurrency transaction is a taxable event. This sounds pretty simple and obvious, until you dig down.

The biggest problem is that the IRS considers cryptocurrency to be “property” for tax purposes. That means it has to be valued at its price on the day it was received and sold. So, every time you accept cryptocurrency, you — and your customers — are subject to capital gains tax, the U.S. Chamber of Commerce noted recently.

“You must keep track of the value for each cryptocurrency on the day it was received and the day it was sold,” the Chamber said in a September blog post. “This can quickly get complicated, especially when you’re managing several transactions a day.”

If that sound like both you and the customer are subject to capital gains tax on each cup of coffee sold, well, that’s becoming the standard example.

And while that presents a potentially unexpected and burdensome challenge for the consumer, it’s even worse for the business, according to accounting and advisory firm Weaver.

“Those with substantial transaction activity will be tasked with burdensome documentation and data maintenance requirements,” it said in a January webinar.

Add in that the value of cryptocurrencies can swing wildly in a day — a bitcoin’s price regularly shifts by thousands of dollars in a few hours — and you got a complex calculation.

That’s something a crypto-focused payments processors can help with. BitPay, for example, will issue most business clients with 1099-K forms that “equate all settlements to the USD value at the time the invoice was created.”

Then there’s the question of whether you’re paying long-term or short-term capital gains tax, which depends on whether or not the cryptocurrency is held for a year or longer.

The U.S. Chamber’s advice: “Consider accepting cryptocurrency for items over a certain dollar value, rather than for daily sales.”

What is it?

Weaver noted that the burden could get more complex as different cryptocurrencies get classified in different ways as the legislative process moves forward.

That refers to the fact that different U.S. regulators and agencies have different opinions of how cryptocurrencies should be classified.

For instance, the Securities and Exchange Commission (SEC) Chairman Gary Gensler has said he believes virtually all cryptocurrencies are securities, while Commodity Futures Trading Commission Chairman Rostin Behnam has said many would be classified as commodities, complaining in a recent Senate hearing that there is a “noticeable gap” under the law in “what constitutes a security and what constitutes a commodity.”

Read more: At Senate Hearing, CFTC Chair Behnam Steps Up Battle With SEC for Crypto Oversight

The States’ Cut

And don’t forget the question of how to treat the acceptance and sale of cryptocurrencies 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 not yet issued guidance on the tax treatment of virtual currency or cryptocurrency” in regards to sales tax.

California treats cryptocurrencies as cash equivalents, subject to the same tax rules. Kentucky does the same, but “requires sellers accepting bitcoins as payment in a taxable transaction to convert the bitcoin into U.S. dollars and charge Kentucky sales and use tax,” it said.

Kansas, on the other hand, “does not subject digital currencies like Bitcoin to sales and use tax.”

One interesting piece of recent crypto tax news is that Colorado plans to accept tax payments in crypto, which would, presumably, be a taxable event.