New York State Tax Department Policy on Use of Virtual Currency

By Brian Gordon

What is virtual currency? Virtual currency is a currency created by people on a computer. If businesses agree to accept the currency, and people trade dollars to buy this currency, you have a viable currency. If a virtual currency can be traded for real currency it is called convertible. The most popular convertible virtual currency is called bitcoin.

Bitcoin was created in 2009 by an unknown person using the alias Satoshi Nakamoto. You can buy Bitcoin at online exchanges. Banks are not involved, there are no transaction fees and you can make purchases anonymously. For these reasons more merchants are beginning to accept bitcoin. You can buy almost anything. Bitcoins are not tied to any country and not subject to regulation. Purchases are generally made by electronic transfer or gift cards are also available. Bitcoins are more often accepted by online retailers, but are also accepted by major retailers such as Walmart, Home Depot, CVS and Target.

Bitcoin can also be purchased as an investment in the same way people invest in other countries’ currencies. In the past fifteen months, a unit of the virtual currency bitcoin sold at over $1,000.00, and more recently under $200.00. Investing in bitcoin is not for the faint of heart. The currency seemed to stabilize however and currently sits at about $270.00.

Due to the popularity of virtual currency, the IRS issued Notice 2014-21 in March 2014 to describe how general tax principles apply to transactions using virtual currency. For federal tax purposes, bitcoin is treated as property. It cannot result in a foreign currency gain or loss. It has a cost basis like other property, and is usually considered a capital asset. An example of when it would not be a capital asset is when it is held by a business mainly for sale to customers.

Recently New York State also felt it necessary to issue policy regarding virtual currency transactions and its treatment for Sales Tax, Corporation Tax and Personal Income Tax. Technical Memorandum TSB-M-14(5)C, (7)I, (17)S explains the policy.

For corporation tax and personal income tax policy New York will follow the federal policy per IRS Notice 2014-21 described above.

New York sales tax policy

The memorandum first begins to explain that since virtual currency is considered property rather than currency, a transaction involving virtual currency is a barter transaction. Normally in a barter transaction both parties must collect sales tax because they are trading/selling property.

Since virtual currency is considered intangible property, the party trading/purchasing with virtual currency is not required to collect sales tax. Therefore, the transaction ends up being much like a purchase with actual currency (U.S. dollars). The purchaser pays sales tax to the seller.

The memorandum goes on to explain how the transaction is different from a currency transaction:

They state that the party that purchases with virtual currency owes sales tax based on the market value of the virtual currency on the time of the transaction, converted to U.S. dollars.

Obviously if a store lists an item for sale in U.S. dollars, and the purchaser agrees to pay that price, the market value of the currency at the time of the transaction is the sales price (the price a willing buyer and a willing seller agree on).

If the seller lists their prices in bitcoin or a foreign currency, then both the price and sales tax amount has to be converted to U.S. dollars at the time of the transaction.

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