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California: You Can’t Pay Your Taxes with Bitcoin

  • Jun 12, 2014 | Gail Cole

 California: Purchase real goods and services with virtual money.

More than one merchant in the San Francisco Ferry Building Marketplace posts the sign pictured above: Bitcoin accepted here. Virtual currency can be used to purchase tangible goods and services in California. When it is, sales and use tax may apply.

According to the California State Board of Equalization (BOE), “sales and use tax applies to [virtual currency] transactions in the same manner as transactions paid using traditional payment methods such as cash or credit card.”

What is it?

According to the Internal Revenue Service (IRS) virtual currency is: “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” It notes: “In some environments, it operates like ‘real’ currency—i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance—but it does not have legal tender status in any jurisdiction.”

The IRS makes a distinction between virtual currency and convertible virtual currency, which “has an equivalent value in real currency, or … acts as a substitute for real currency.” Bitcoin is convertible virtual currency, which is why some merchants in San Francisco’s Ferry Building Marketplace accept it as payment.

There are real-world tax consequences when convertible virtual currency is used to pay for “goods or services in a real-world economy transaction.” The IRS deals with federal tax consequences. States must address state taxes, as the BOE does in the recently released Special Notice.

If sales tax would be due on a cash, credit, debit or check purchase, sales tax is due on a purchase made with bitcoin. However, retailers must retain different records for bitcoin transactions. As explained by the BOE: “Retailers accepting virtual currencies as payment should retain documentation on the amount for which they regularly sell the same or similar property to their customers when payment is made in United States dollars (cash, check, credit card, or debit card).”

In an example of a restaurant transaction, the BOE states that the restaurant “should retain a copy of the menu in its records to document the measure of tax from its Bitcoin transactions.” Virtual currencies are convenient for consumers, but they may create an extra layer of work for retailers.

Want to pay your California taxes, fees and penalties with virtual currency? No can do. “The BOE does not accept virtual currencies as a payment method for any tax or fee program.”

Want to facilitate sales tax filing? Learn how automated sales tax works.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.