If you’ve been paying attention over the last few years, you’ve surely heard of Bitcoin, a virtual currency becoming more and more common – especially in California. But since Bitcoin is virtual and unregulated (at least at this point), there are a lot of questions surrounding the digital currency and how it relates to state tax issues.
What is bitcoin? Bitcoin is a virtual currency created in 2009. Transactions are made directly between two parties, without banks or other fees included. They can also be used anonymously, making it possible for users to buy or sell anything without it being easily traced back to them. Because bitcoins are stored in a “digital wallet” either in the cloud or on a computer, the FDIC doesn’t insure them, meaning they can be easily lost through server hacks and viruses.
What about regulation? As bitcoin has become more popular, the question of regulation has become more common. Two states – California and Colorado – are working to regulate this virtual currency due to its prevalence within their states. I would imagine more states will follow suit as bitcoin becomes more and more popular.
What type of asset is it? IRS Notice 2014-21 defines bitcoin as property, not currency, which means general property tax principles would apply.
At this point, there are a lot of questions surrounding bitcoin:
- How and when will businesses recognize gains/losses on valuation, since the valuation can fluctuate a lot?
- Is the sale of bitcoins subject to sales tax in any state?
- Given the already complex sourcing rules, will the use of bitcoin further muddy those waters?
- Will the value of bitcoin be included in the apportionment factor? Generally intangibles are not included.
- Will states require special record keeping for virtual currencies like bitcoin?
We’ll continue to follow this news and share updates as more of these questions are answered. In the meantime, do you accept bitcoin at your business? What benefits and challenges has it caused?
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects, including the new California Competes Tax Credit and the California Manufacturers’ Partial Sales Tax Exemption. To learn more, contact us today at www.MilesConsultingGroup.com.
Photo Credit: Antana
