You’re probably familiar with the common question, “Cash or card?” However, over the last decade, a newcomer has entered the race. Virtual currencies, and its subset “cryptocurrencies,” which use cryptography to validate and secure transactions, have exploded onto the scene, offering a brand-new avenue for commerce.
However, similar to the lack of consistency among economic nexus and marketplace facilitator laws, legislation concerning virtual currencies also varies wildly state to state.
A Brief History of Virtual Currency
While most people have at least heard of them at this point, there is still a great deal of confusion regarding virtual currencies, how they work and what exactly they are.
Bitcoin is the most popular form of virtual currency, first introduced in 2009 and valued for the first time in 2010.
The technical details of the currency are complex, but as shared by Investopedia, the most important aspects are as follows:
- Bitcoins are “mined” through complex computer systems which solve “complicated puzzles in an effort to confirm groups of transactions called blocks.”
- When this occurs, miners are rewarded with bitcoins. A distributed ledger called a “blockchain,” records the transactions.
- The currency can then be used to make purchases wherever its accepted.
Bitcoin made headlines several years ago as the value skyrocketed, reaching a staggering $19,783 per unit in December 2017. As of Sept. 1, 2020, Bitcoin is currently trading at $12,019, according to CoinDesk.
Despite Bitcoin’s dominance over the market, it’s far from the only option for those interested in virtual currency. Since Bitcoin’s introduction, over 1,600 cryptocurrencies have followed, each with its own pros and cons.
Federal Regulation of Virtual Currency
On a federal level, all virtual currencies that have, “an equivalent value in real currency, or that acts as a substitute for real currency,” are referred to as “convertible” virtual currency, as described by the IRS. These convertible virtual currencies, when sold, exchanged, used to pay for goods or services or used to hold an investment, are generally subject to tax laws and may be subject to tax liability.
The IRS issued guidance in IRS Notice 2014-21 to, “describe how existing general tax principles apply to transactions using virtual currency.”
Virtual Currencies on the State Level
As mentioned above, there is little consistency when it comes to the way states are handling the taxability of virtual currencies.
One of the most well-known attempts at comprehensive regulations came from New York with its BitLicense framework. Issued by the New York State Department of Financial Services in June 2015, the regulations resulted in what the New York Business Journal termed the, “Great Bitcoin Exodus,” with a majority of Bitcoin companies leaving the state as a result of the strict rules and requirements.
For many other states, current legislation does not specifically include language regarding virtual currencies. However, some of these states, such as North Dakota and New Mexico, have issued guidance regarding the sale, transmission or usage of virtual currencies.
Others, such as Vermont, directly apply existing legislation, such as money transmission laws, to virtual currency.
In regards to paying taxes, Ohio became the first state to allow taxes to be paid with Bitcoin in November 2018. However, the state flipped its stance in October 2019, suspending their program for cryptocurrency tax payments.
Overall, virtual currencies are still in their infancy as far as mainstream usage. However, as more states issue guidance regarding its use, it’s important your business is complying with state and federal regulations should you choose to accept virtual currencies for payment.
Do You Have Questions About Virtual Currencies?
If you have questions about virtual currencies and the tax liability that comes along with them, please contact us today. We’re happy to clarify any multi-state tax issues you’re trying to navigate.
