Virtual Currency: Subject to Sales Tax or Not?
Subject to Sales Tax or Not
What is virtual currency? Is it subject to income tax? Is it subject to sales tax? Is it currency? What is it?
We started talking about Bitcoin a few years ago (first launched in 2009) and how techies were getting rich with it. My question was, what is it and how can you get rich with it? Then, since my world revolves around indirect taxes, I began to wonder if its purchases were subject to sales and use tax. But first I had to understand the basics.
Virtual Currency 101
Bitcoin is a decentralized digital currency through peer-to-peer computer networks, mathematically generated for mining of virtual currency. Bitcoin was initially set up with a limit, which is still in place today, to the amount available for mining (funding) to prohibit devaluation of those already in circulation. Bitcoin was the leader of the process and now there are many followers: Litecoin, Darkcoin, Peercoin, Dogecoin, and Primecoin to name a few.
The premise of virtual currency is through digital wallets on your computer or mobile phone allowing you to transfer funds to and from other wallet holders. The transaction is included in the block chain – a shared public ledger – with a private key used to sign the transaction, then mined to confirm the transaction. Virtual currency can be bought and sold in return for traditional currency and goods and services.
The IRS determined that virtual currency is not a real currency with legal tender status, but considered property (IRS Notice 2014-21, 3/25/2014). As of now, no country accepts virtual currency as legal tender; therefore, general tax principles apply to virtual currency same as property transactions. Wages paid by virtual currency is subject to income and payroll taxes at the fair market value and reported on Form W-2. Goods and services purchased or sold for virtual currencies are considered gross income at fair market value.
The Merriam-Webster Dictionary definition of sales tax is “a tax levied on the sale of goods and services that is usually calculated as a percentage of the purchase price and collected by the seller”. Virtual currency is considered a barter or exchange transaction for goods or services. The value of the transaction is the retailers or service providers selling price.
Many states are grappling with providing regulations and rules for taxing virtual currency transactions. In New York, purchases of goods or services with virtual currency must have the sales tax in US dollars separately listed on the sales slip or invoice. Wisconsin computes sales tax on the value of consideration by the seller in US dollars. The state of Washington subjects virtual currency transactions to sales and use tax as well as the retailing Business and Occupational tax, in US dollar values.
States are determining purchases with virtual currency do not change the tax classification of the purchase. States are adopting the notion of paralleling virtual currency transactions to barters or exchanges for sales and use tax purposes. The measure of tax is on the amount of the sale in US dollars, regardless to any fluctuation in the virtual currency value. Record keeping of virtual currency transactions should be the same as legal tender transactions.
What this means for retailers or service providers accepting virtual currency –the retailer must either collect sales tax on taxable transactions or the purchaser is liable for the use tax. Under audit, the retailer will most likely be held responsible for non-collection. The sales tax should not be recorded in virtual currency value, but in US dollar values. The same liabilities and penalties will apply to virtual currency transactions as to legal tender transactions if they are not handled properly.
The calculation of virtual currency is not easy to understand or to use. More retailers and service providers are accepting virtual currency for payment. Hotel rooms, online purchases, sports event purchases are becoming more popular among a certain technical population.
- Purchases of goods and services with virtual currency are generally subject to applicable sales and use tax rules at the fair market value of the purchase.
- The purchase of virtual currency is generally non-taxable and considered a purchase of intangible property.
Questions still at large, at federal and state levels:
- Regulations and licensing for virtual currency transactions
- Foreign monetary issues
- Income taxes are still vague
Laura Hoffman is an Indirect Tax Specialist living in Las Vegas, Nevada. Laura retired from a multi-state natural gas distribution company after specializing in sales & use taxes, franchise fees, business licensing, property taxes, excise and utility taxes for over 15 years.