TEI Los Angeles May 15, Michele Borens Andrew Appleby. Business in Bitcoins

Transcription

1 TEI Los Angeles May 15, 2015 Michele Borens Andrew Appleby Business in Bitcoins 1

2 Agenda Objective Overview What is a Bitcoin? Types of Virtual Currency Advantages of using Virtual Currency Commercial Use Federal Guidance State Guidance Key Takeaways Q&A 2

3 Objective 3

4 Objective Have a general understanding of the types of and issues related to various virtual currencies. Have a general understanding of what a Bitcoin is, how it came to be and how it is used. General understanding of the Federal/IRS rules as it pertains to Bitcoin and other virtual currencies. Understand the published state positions on the sales & use tax treatment of transactions involving Bitcoin. 4

5 Overview 5

6 Virtual Currency (not including Bitcoin) Some sellers allow customers to purchase or earn virtual currency in the form of codes or tokens. Often the code or token can only be redeemed from the particular seller. Often the code or token can be gifted. Often can be redeemed for goods or services that would be taxable if purchased directly with traditional currency. Sellers often to do not distinguish between codes or tokens that were gifted, earned, or purchased. 6

7 Codes and Tokens Is the purchase of codes or tokens the purchase of TPP? Not actually tangible property What if code information is contained on a physical card? Usually do not contain any software (i.e., source code) Should be considered the purchase of an intangible Apple Computer, Inc., TSB-A-07(14)S But 7

8 Codes and Tokens What if the code or token is redeemed for a taxable good or service? What is the code or token can only be redeemed for taxable goods or services? 8

9 What is a Bitcoin Bitcoin is a form of digital, virtual or cyber currency that was created in 2009 by a person using the alias Satoshi Nakamoto It is relatively anonymous and is not backed by the government or any central bank. Users can transfer Bitcoins to each other online and store the currency in digital wallets. Transactions are made with no middle men (i.e. banks)!. Bitcoin has grown popular with the younger tech savvy community due to the relative anonymity it offers, but that has also led to the currency being used for illegitimate purposes like the black market More commercial merchants are beginning to accept them 9

10 What is a Bitcoin Miners earn Bitcoins by solving math problems Open Source Protocol-Miners approve transactions Its used like money, but it is not currency Like Money Used to by goods and services Rulings by US Dept. of Treasury/FinCEN Not Like Money Not backed by any sovereign nations Taxation No intrinsic value-market based pricing Transactions are fast 10

11 What is a Bitcoin FinCEN Rulings FIN-2013-G001, FIN-2014-R001,002 Money Services Business Money Transmitter Convertible Virtual Currency SEC Investor Alert (May 7, 2014) Federal Election Commission OK s acceptance of donations in Bitcoin (May 8, 2014) IRS Notice : Determination as Property 11

12 Types of Virtual Currency 12

13 Types of Virtual Currency Top Ten Crypto-Currency Market Capitalizations 2/12/15 Source: 13

14 Advantages of using Virtual Currency 14

15 Advantages of using Virtual Currency Instant Peer to Peer Transactions Zero or Low Processing Fees Protection against Fraud Fast International Payments No PCI Compliance Required Free Publicity Multi-signature approval Accounting Transparency 15

16 Commercial Use of Bitcoin 16

17 Commercial Use of Bitcoin Receive as payment from customers Transfer funds between entities or people in different countries Pay suppliers/consultants foreign or domestic Market maker Market decides buy and sell price Financial instruments Hold for investment Exchanges Payment processors 17

18 Federal Guidance 18

19 Federal Law IRS Notice (Mar. 25, 2014) Notice describes how existing general tax principles apply to transactions using virtual currency. The notice provides this guidance in the form of answers to frequently asked questions. 19

20 Federal Law IRS Notice Background The IRS is aware that virtual currency may be used to pay for goods or services, or held for investment. 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. Although it operates like real currency of the United States or of any other country that it 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 20

21 Federal Law IRS Notice Background (Cont d) Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as convertible virtual currency. Bitcoin can be digitally traded between users and can be purchased for or exchanged into U.S. dollars, Euros, and other real or virtual currencies. For a more comprehensive description of convertible virtual currencies to date, see Financial Crimes Enforcement Network Guidance (FIN-2013-G001, March 18, 2013). 21

22 Federal Law IRS Notice Scope This notice addresses only the U.S. federal tax consequences of transactions in, or transactions that use, convertible virtual currency. The term virtual currency refers only to convertible virtual currency as described in this notice. The Treasury Department and the IRS request comments from the public regarding other types or aspects of virtual currency transactions that should be addressed in future guidance. 22

23 Federal Law IRS Notice Response to FAQ s For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency. Under currently applicable law, virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes. 23

24 Federal Law IRS Notice : Response to FAQ s A taxpayer receiving virtual currency as payment for goods/services, in computing gross income, must include the FMV of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received (Pub 525, Taxable and Nontaxable Income) Variety of other FAQ s related to gains/losses, wages, self-employment taxes, 1099 reporting and back-up withholding, etc. 24

25 State Guidance 25

26 State Guidance California Special Notice JUNE 2014 #L-382 Businesses and individuals who accept virtual currencies as a payment method should be aware that sales and use tax applies to such transactions in the same manner as transactions paid using traditional payment methods such as cash or credit card. CA notice references IRS Notice explains that virtual currencies do not have legal tender status in any jurisdiction and virtual currencies should not be treated as United States currency or foreign currency, but instead, as property. For the same reason, virtual currencies are not regarded as United States currency or foreign currency for purposes of the CA Sales and Use Tax Law. Tax applies to sales of tangible personal property in exchange for virtual currency in the same way as it does with any other sale of tangible personal property for a consideration. 26

27 State Guidance California (cont d) The measure of tax is the total amount of the sale or lease, whether received in money or other consideration. Regulation 1654, Barter, Exchange, Trade-Ins and Foreign Currency Transaction, further provides that the measure of tax from a barter or exchange transaction includes any amount allowed by a retailer to the customer for property or services of any kind. Therefore, if a retailer enters into a contract where the consideration is virtual currency, the measure of tax from the sale of the product is the amount allowed by the retailer in exchange for the virtual currency (generally, the retailer s advertised selling price of the product.) 27

28 State Guidance California (cont d) Example: A restaurant sells a taxable meal with an advertised menu price of $50. Customer pays the restaurant bitcoin for the meal. The measure of tax from the sale of the meal is $50, which is the amount allowed by the retailer for the bitcoin at the time of the sale. Similarly, the restaurant sells a taxable meal to a customer with the menu price of $50. Customer pays the restaurant 1 bitcoin for the meal. The measure of tax from the sale of the meal is still $50. The restaurant should retain a copy of the menu in its records to document the measure of tax from its Bitcoin transactions. Retailers accepting virtual currencies should retain documentation on the amount for which they regularly sell the same or similar property to their customers when payment is made in USD(cash, check, credit/debit card.) 28

29 State Guidance Kentucky Kentucky Sales Tax Facts June 2014 References that the IRS ruled that for federal income tax purposes this product is treated as property and not currency. For Kentucky sales and use tax purposes, Bitcoins are the consideration provided by the purchaser in the transaction. Any business that accepts Bitcoins as a form of payment must convert the Bitcoin into U.S. dollars, and charge 6 percent Kentucky sales and use tax on any taxable transaction for which Bitcoin represents the financial instrument of consideration. Documentation must be maintained to verify the value of Bitcoin at the time of the transaction. 29

30 State Guidance Missouri The DOR determined that Bitcoins are intangible property not subject to tax under Missouri Sales and Use Tax Law. The taxpayer described Bitcoins as a form of digital currency that is created by software and stored electronically. The taxpayer sold Bitcoins in exchange for paper currency through automated teller machines. Because Missouri sales and use tax is imposed only on transactions involving tangible personal property and specifically enumerated services in Missouri not intangible property the Department stated that sales tax did not apply to purchases of Bitcoins. Department explained that the Missouri Sales and Use Tax Law does not contain an enumerated taxable service that would encompass intangible property such as Bitcoins. 30

31 State Guidance New Hampshire HB552 introduced January 8, 2015 Proposed bill could obligate the state treasury to develop an implementation plan for the state to accept bitcoin as payment for taxes and fees beginning July 1, If the bill is passed by the House, it would make the New Hampshire the first state to accept the digital currency at an official level. ml 31

32 State Guidance New York TSB-M-14 (17)S, December 5, 2014 Reference to the IRS Notice New York state and local sales taxes are imposed on the receipts from retail sales of TPP and sales of certain services delivered by a seller to a purchaser or to the purchaser s designee in New York State. The term sale includes a barter transaction in which TPP or services are given by one person in consideration for TPP or services received in return from another. [See 20 NYCRR 526.7(d)]. State and local use taxes, the term purchase likewise includes a barter transaction 32

33 State Guidance New York (Cont d) A barter transaction is actually comprised of two separate sale transactions. Each party to a barter transaction gives something of value to the other party in order to receive something of value in return. In a barter transaction, sales or use tax is due from each party based on the value of the property or services given in trade if what is received in exchange is subject to tax. Taxable services given in trade are taxed based upon a party s normal charge for the service it provides. 33

34 State Guidance New York (Cont d) The use of convertible virtual currency by a customer to pay for goods or services delivered in New York State is treated as a barter transaction. For sales tax purposes, convertible virtual currency is intangible property. Since the purchase or use of intangible property is not subject to sales tax, any convertible virtual currency received by a party to a barter transaction is not subject to sales tax. However, if the party that gives convertible virtual currency in trade receives in exchange goods or services that are subject to sales tax, that party owes sales tax based on the market value of the convertible virtual currency at the time of the transaction, converted to U.S. dollars. 34

35 State Guidance New York (Cont d) If the party that trades property or services in exchange for receiving convertible virtual currency gives the other party a sales slip, invoice, or receipt, the first party must separately state the sales tax due in U.S. dollars on the sales slip, invoice, or receipt. A seller making sales in New York State that accepts convertible virtual currency in exchange for taxable goods or services must: register for sales tax purposes; record in its books and records the value of the convertible virtual currency accepted at the time of each transaction, converted to U.S. dollars; record in its books and records the amount of sales tax collected at the time of each transaction, converted to U.S. dollars; and report such sales and remit any sales tax due in U.S. dollars when filing its periodic sales tax returns 35

36 State Guidance New York (Cont d) Example 1: An online retailer registered for New York State sales tax purposes accepts convertible virtual currency from a customer as payment for home décor items that will be delivered to the customer s location in New York State. Because home décor items are taxable, the customer owes sales tax based on the taxable receipt for the purchase of the items. The taxable receipt is the fair market value of the convertible virtual currency in U.S. dollars at the time of the transaction. However, because convertible virtual currency is intangible property, the retailer does not owe any sales tax on its exchange of home décor items for the convertible virtual currency. 36

37 State Guidance New York (Cont d) Example 2: A vendor in New York State that accepts convertible virtual currency as payment creates custom computer software for sale to a client. The custom software is delivered to a New York location. Since the sale of custom software is not subject to sales tax, this barter transaction is an exchange of a non-taxable product for non-taxable convertible virtual currency. No sales tax is due on this transaction. 37

38 State Guidance New York (Cont d) Example 3: A New York State resident sends her watch to be repaired at a New York repair shop that accepts convertible virtual currency for its services. Since watch repair services are subject to sales tax, the resident owes sales tax based on the taxable receipt for the purchase of the service. The taxable receipt for the repair service is the fair market value of the convertible virtual currency at the time of the sale. The repair shop must collect the sales tax and must separately state the tax from the fair market value of the convertible virtual currency on any sales slip, receipt, or invoice provided to the customer. The repair shop must also record in its books and records the amount of the sale and the sales tax collected in U.S. dollars, and report the sale and remit the sales tax due in U.S. dollars when filing its periodic sales tax returns. 38

39 State Guidance New Jersey On April 2 nd, the New Jersey Division of Taxation released guidance on the treatment of virtual currencies such as bitcoins. The guidance indicated that sales tax is due on transactions using virtual currency and taxpayers realize a gain or loss on the sale or exchange of the currencies. The exchange of virtual currency for goods or services is treated as a barter transaction, and as in any other barter transaction, sales or use tax is due from each party based on the value of the property or services given. Retailers who accept virtual currencies must keep records of the value of the virtual currency accepted in each transaction converted to dollars and the amount of sales tax collected during the transaction, also converted to dollars. 39

40 Key Takeaways 40

41 Key Takeaways A Bitcoin is considered property for Federal and State purposes. A Bitcoin is generally considered intangible property so the purchase/acquisition of Bitcoin will be exempt from sales/use tax. Bitcoin is generally going to be considered some form of consideration in exchange for products and services. The taxability of the transaction will be determined based on the taxability of the products and services sold/bartered for. 41

42 Key Takeaways Sourcing will follow the general sourcing rules on retail sales transactions Generally, a taxable transaction involving Bitcoin will be subject to tax as a retail transaction or a barter transaction. The selling price of transactions paid for in Bitcoin will typically be the normal selling price. The value of the Bitcoin will be valued in USD at the time of the transaction. As with all transactions subject to sales tax rules, it is very important to adequately document transactions involving virtual currency! 42

43 Questions? Michele Borens Sutherland Asbill & Brennan LLP Andrew Appleby Sutherland Asbill & Brennan LLP

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