NY clarifies bitcoin taxation, affirming "intangible property" classification and likening bitcoin transactions to bartering
Bitcoin bulls got some welcome clarity today pertaining to the tax treatment of their crypto-currency purchases. The New York State Department of Taxation and Finance has declared that purchases of bitcoin will not be subject to sales taxes. On the other hand, some purchases of goods and services made using Bitcoin as a currency will be subject to sales tax, potentially eroding the appeal of using the digital currency in place of fiat currency (cash) and payment cards.
The Taxpayer Guidance Division released a memorandum late last week reaffirming earlier IRS guidance that digital currencies are “intangible property.” As a result of this classification, purchases made using Bitcoin are viewed as being akin to bartering, or trading one good or service for another.
The Taxpayer Guidance Division memorandum reads:
The use of convertible virtual currency by a customer to pay for goods or services delivered in New York State is treated as a barter transaction. For sales tax purposes, convertible virtual currency is intangible property. Since the purchase or use of intangible property is not subject to sales tax, any convertible virtual currency received by a party to a barter transaction is not subject to sales tax.
However, 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. The Bitcoin community has long feared a classification of bitcoin and other digital currencies that would render their purchase taxable, resulting in double-taxation upon their spending. In that sense, any clarification that this would not be the case is a positive development. The move draws the US in line with the UK, Finland, Belgium, and the Netherlands in exempting bitcoin from VAT. Singapore, Australia and other markets, on the other hand, have subjected digital currency exchanges to VAT in some circumstances.
While many consumers would welcome an opportunity to skip sales tax when spending bitcoin to purchase goods and services – similar to taxation grey-area advantage Amazon exploited for years – it was always wishful thinking to believe this would come to fruition.
The memorandum adds additional requirements of merchants making sales in exchange for bitcoin, including:
While these potential onerous administrative requirements could disincentives some merchants from accepting virtual currency payments, the represent an equally large opportunity for payments and point of sale technology companies to innovate their products to automate much of this reporting. Remember, we are still in the early days of the virtual currency era.
- register for sales tax purposes;
- record in its books and records the value of the convertible virtual currency accepted at the time of each transaction, converted to U.S. dollars;
- record in its books and records the amount of sales tax collected at the time of each transaction, converted to U.S. dollars; and
- report such sales and remit any sales tax due in U.S. dollars when filing its periodic sales tax returns.
Uncertainty has been labeled the enemy of all manner of things including, “investment,” to economic “recovery,” “jobs” growth, and “philanthropy.” For bitcoin, uncertainty pertaining to tax-treatment has been the enemy of mainstream adoption and, thus, transaction growth. The situation has had a chilling effect on institutional trading activity as well.
Thus, recent efforts by key economic states like New York and California, as well as the US federal government to deliver clarity – almost regardless of the ultimate outcome of their decisions – should generally loosen the reins on the bitcoin market. There are still outstanding questions around Bitcoin’s future, but slowly, tax treatment is being removed from that list.