For several years now, the number of people learning about Bitcoin has continued to grow. With it, so have the number of merchants/businesses that have begun accepting Bitcoin as a form of payment in exchange for goods and services. Accepting payment in Bitcoin is a great way to open up to a new demographic of Internet users – one that processed a total value of over $150,000,000 payments in 2014. One of the first things businesses must realize, however, is that accepting bitcoin and accounting for bitcoin-related sales is not the same as cash or credit cards. This post explains why in the context of a business that is accounting and filing taxes in the United States.
Last year, the IRS issued Notice 2014-21. This notice provided guidance on how bitcoin and other digital currencies would be taxed in the United States. This in turn gave additional guidance on how bitcoin and other digital currencies must be accounted for. First and foremost, the notice classified bitcoin and digital currencies as capital assets. This meant that they wouldn’t be taxed like currencies or accounted for like them. More so, they would need to be accounted for similarly to stocks and/or real estate – both capital assets. When an individual (or business) receives a capital asset it must keep track of the price it acquires it at and the price at which it is redeemed at.
This accounting requirement is for the purposes of determine capital gains or losses. If a capital asset is redeemed in less than 365 days after it was acquired, and it is worth more than it was acquired for, the asset incurs a short-term capital gain. Alternatively, if the capital asset was held more than 365 days but all other variables remain the same in our previous example, the asset incurs a long-term capital gain. In either scenario if it is redeemed for less than it was acquired for, a capital loss can be accounted for.
When a business (or individual) receives bitcoin or a digital currency as a form of payment in exchange for services or goods, it must therefore follow the above process to account for their receipt correctly. First, the acquisition of bitcoin or digital currency for the good or service must immediately be accounted for as sales. Next, if the bitcoin or digital currency isn’t immediately converted to dollars at the time of sale (e.g. a business has elected for a portion of their sales beyond immediate the point of sale to remain in bitcoin or a digital currency) the traditional capital asset accounting methods above must then apply. In addition, it must also utilize a cost-basis method such (e.g. FIFO, or in some cases LIFO or other methods) for determining the overall gain or loss.
In conclusion, it’s important for businesses/merchants who are accepting bitcoin or other digital currencies in the United States check to see if they are immediately converting their digital currency receipts to dollars at the time of sale, or if they are holding it for a period of time and redeeming it for dollars at a later date. If it’s the latter it’s important that proper accounting methodologies are being utilized to ensure compliant books and records are being kept in order to avoid problems.