You can’t pay taxes with bitcoin in Washington state
- Sales and Use Tax
- Aug 28, 2019 | Gail Cole
Most states don’t accept bitcoin as a form of payment, at least not yet. In fact, most state tax departments currently don’t provide much guidance on cryptocurrency, though that’s gradually changing. Tax departments in New Jersey, Ohio, and now Washington have all published guidelines on how sales tax and other tax applies to virtual currency transactions.
The Washington Department of Revenue announced last week that it doesn’t accept bitcoin or other cryptocurrencies. Sellers who accept payment in bitcoin must either convert it to U.S. dollars at the time of sale or afterward.
When cryptocurrency is converted to U.S. dollars immediately, at the point of sale, tax is computed on the converted amount. Record keeping is paramount in cryptocurrency transactions: The time of sale, the value of the converted amount (sale), and documentation of the transaction must be retained. Acceptable documentation includes:
- A dated record of the bitcoin transferred from the buyer to the seller (time of sale)
- A dated record of the bitcoin conversion to U.S. dollars by the seller (value of sale)
- A copy of the sales invoice issued from the seller to the buyer (transaction documentation)
When cryptocurrency isn’t immediately converted to U.S. dollars, tax must be based on the “value of bitcoin, expressed in US dollars, as of the date of sale.” The value of the cryptocurrency should be determined by a reliable cryptocurrency pricing index, such as the WorldCoinIndex; once a value is determined, it should be used to determine the applicable retail sales tax or retailing B&O tax.
It’s essential to document all aspects of such transactions. Appropriate documentation includes a record of the time of sale, a copy of the invoice issued to the customer, and a dated record of the cryptocurrency value published on a reliable cryptocurrency composite index.
Tax implications of bitcoin mining
There are also sales tax implications to bitcoin mining, which is the process of digitally adding transaction records to bitcoin’s public ledger of historical transactions, or the blockchain. The blockchain confirms bitcoin transactions to the bitcoin network at large.
Bitcoin miners earn block rewards for mining bitcoin and transaction fees for processing bitcoin transactions. Block rewards and transaction fees are considered gross income from activities subject to the service and other activities B&O tax.
The tax owed on block rewards and transaction fees is based on the value of bitcoin at the time it’s obtained by the miner. As above, bitcoin miners must record the date the bitcoin was received and a dated record of the bitcoin’s value (per a reliable cryptocurrency pricing index).
Individuals may be eligible to claim a B&O tax deduction for amounts derived from investments. However, financial business entities may not claim the deduction. Additional details are available in these Washington Department of Revenue guidelines on the taxability of bitcoin-related activities.
Other states weigh in on virtual currency
Under Alabama’s 2018 marketplace facilitator law, a “marketplace facilitator” includes a person that contracts with marketplace sellers to facilitate the sale of products through a physical or electronic marketplace and provides “a virtual currency that purchasers are allowed or required to use to purchase products from the marketplace seller.”
The New Jersey Division of Taxation announced in 2015 that although the purchase of use of virtual currency is not subject to sales tax, “New Jersey sales or use tax applies when a person transfers convertible virtual currency for taxable goods or services.”
The Ohio Department of Taxation began accepting cryptocurrency for tax payments in 2018. It continues to be an outlier.
Sales tax laws often struggle to keep pace with evolving technology, just as businesses struggle to keep up with changing sales tax laws. Automating sales tax compliance eases that burden.