Are you considering accepting bitcoin payments at your business? More than 50,000 U.S. merchants already accept bitcoin, and you may soon fall behind your competitors if you don’t have a plan for dealing with cryptocurrencies. As you develop your plan, remember that the government still expects full tax compliance for digital currency transactions, which makes it important to understand what bitcoin is and how a sale involving payment with bitcoins will be taxed.
Bitcoin is a digital currency that enables transactions to take place directly between buyer and seller without an intermediary, such as a bank, to collect and distribute funds. Instead, the transactions are recorded in a distributed ledger called a blockchain. While the ledger is public and viewable, the identity of the buyers and sellers is generally anonymous. As such, bitcoin has both benefits and drawbacks. The benefits include greater privacy, the instant transfer of funds, and the elimination of the complexity and costs of relying on intermediaries. Merchants may also find they benefit greatly from reduced transaction fees.
As you think about the potential implications of bitcoin for your business, here are six things you should be aware of:
- Transactions paid for in digital currencies are taxed in the same way as transactions paid for with traditional currencies. The government expects you to collect and remit any applicable sales tax that you would otherwise be responsible for on transactions where payment is made in bitcoin and other cryptocurrencies, just as you do for transactions paid for in U.S. dollars.
- Transactions paid for in bitcoin should be reported along with all your other reportable transactions on the same tax forms you use today. For example, your gross sales number should include the total of all reportable U.S. dollar transactions plus the U.S. dollar value of all bitcoin transactions.
- Don’t expect that the anonymous nature of the blockchain means the government cannot find out about your digital currency transactions. Records of bitcoin transfers are kept in a public database that the government can review. Even though identities in that database are anonymous, the government has in certain cases broken that anonymity. The government is also seeking transaction data from major bitcoin exchanges, such as in the current IRS lawsuit against Coinbase.
- It is important to track the desire on the part of some governments to obtain real-time reporting on all transactions, including bitcoin transactions, in order to ensure proper tax collection and reporting and to accelerate receiving the tax funds. If you do business internationally, this development could directly impact how you report and pay your sales tax obligations.
- Consider how third-party services will be able to automate the sales tax calculation, collection and reporting process for bitcoin transactions. Manually calculating your sales tax obligation for bitcoin transactions can be very confusing and time-consuming, especially as tax rates, rules and reporting requirements change. However, trying to purchase, deploy and maintain software for this purpose can be very complex and expensive. A third-party cloud-based service can usually integrate with your existing systems with little disruption. Such a service will also ensure your calculations are based on the latest tax rates and comply with the latest tax regulations.
- Another important trend is the evolution of ‘smart contracts’ tied to bitcoin transactions. These will likely develop over time to include and automate sales tax calculations and payments as part of the transaction itself. However, these smart contracts may still be years off, so you will likely not want to wait for this development to begin your bitcoin journey.
Every major change in how we do business represents both disruption and opportunity. Bitcoin is no different. Over the short term, it means getting educated about the technology and adapting some business processes. Over the long term, it offers increased simplicity, greater efficiency and lower costs. And if you begin the journey now, it may provide you with a distinct advantage over the competition.
