No doubt, many aspects of the bitcoin phenomenon would astound Benjamin Franklin if he were alive today. Though perhaps not as many as you might expect. Anyone inquiring into the prospect of accepting bitcoin payments will also find the taxation issue inescapable. Two questions are inevitable:. Where are we at now with bitcoin from a financial management perspective? Government regulations are in place.
Technologies are emerging from the bitcoin development community that help ease accounting difficulties. And, standardized bitcoin business death and taxes bitcoin exchange is starting to take shape.
On March 25th,the IRS ended one of the great mysteries surrounding bitcoin when it released Notice For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency. The announcement signified that revenues realized from the sale or exchange of bitcoins would count as capital gains. According to the IRS:. A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer.
For many bitcoin advocates the hope had been that bitcoin would be treated the same as any foreign currency. But for daily business purposes, the IRS decision settled the tax status issue. In the eyes of the tax collection agency, Bitcoins are indeed property and capital gains taxes are be due on revenues from their sale or exchange. Calculating gains on bitcoin assets is different than with many other assets, though, for a few reasons:.
These differences present a challenge related to establishing initial bitcoin purchase prices. But it gets harder when transaction counts rises to the hundreds death and taxes bitcoin exchange thousands.
So how do you determine death and taxes bitcoin exchange basis purchase price on bitcoin transactions for capital gains calculation? Death and taxes bitcoin exchange recent Investopedia article discussed the topic:. A tax attorney posting on the bitcoin subreddit warned against using methods other than FIFO:. Once a bitcoin is purchased, it becomes indistinguishable from the other bitcoins stored in the same wallet or account.
In a subsequent sale or exchange, there is no way to trace the cost or acquisition date of the bitcoin being transferred out. At this point, the IRS has not officially death and taxes bitcoin exchange which asset valuation methods are permissible. However, financial executives should know that the IRS has already shown that it is willing to death and taxes bitcoin exchange retroactively. IRS Notice did more than simply declare digital currency to be assets. The capital gains calculation issue is significant.
Death and taxes bitcoin exchange threatens the very practicality of accepting bitcoin payments. But the bitcoin development community is already offering some solutions to the capital gains calculation dilemma.
Each service integrates with various bitcoin exchanges and digital wallets. And, for the moment at least, both services are free. Though each offers premium tax preparation related services for a fee. By leveraging bitcoin merchant payment processing services, bitcoin can be kept as a supported payment method without incurring capital gains or losses.
Many bitcoin payment processors will accept bitcoin payment on your behalf and pay you in cash. Since you never have possession of the bitcoins, you bear none of the responsibility related the risk of fluctuations in the bitcoin value.
This prevents the possibility for capital gains and losses. The typical bitcoin payment processing services arrangement allows you to maintain an account with the merchant processing provider, from which you can withdraw funds. Since the IRS considers bitcoins to be property, they need to be treated as such for accounting purposes. Consequently, company owned bitcoin holdings should be recorded to non-cash asset accounts in the general ledger. Bitcoins do not require the complex depreciation scheduling that fixed assets do, though.
Fair market value can be more easily ascertained from active bitcoin exchanges. Tracking bitcoin accounts as foreign currency accounts would seem to present another possibility. Death and taxes bitcoin exchange are divisible up to 8 decimal points. Most accounting software solutions stop at the traditional 2. Tracking the converted cash value of bitcoin asset accounts avoids this issue.
It also conforms with the IRS guidance on the topic. For instance, what happens when an accounts receivable entry is paid via bitcoin? The Bitcoin Wiki answered the question this way:. In practice, Bitcoin is likely no different than accepting payment in other forms, such as cash, or gold, or scrip, or gift cards or foreign currency. What would you ask your accountant if you decided that you wanted to accept Berkshire Bucks or 1-ounce gold coins as payment? It both satisfies the accounting matching principle and allows for the creation of an account dedicated to tracking capital gains for tax purposes.
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