The New York State Department of Taxation and Finance (Department) has released its policy regarding the treatment of digital currency transactions for sales tax purposes. The policy, which essentially mirrors existing state sales tax law as well as the federal approach to income tax, helps add clarity and consistency to the developing regulatory framework for digital currencies.
The new policy, Technical Memorandum TSB-M-14(5)C, (7)I, (17)S, Tax Department Policy on Transactions Using Convertible Virtual Currency, provides detailed clarification on the taxable treatment of digital currencies as well as guidance on the types of transactions that will trigger state sales tax. Under the policy, New York will treat transactions for the sale of goods and services in exchange for digital currency as barter transactions, or the exchange of something of value for something else of value. Normally, a barter transaction triggers two separate taxable transactions, as both parties must account for the value of the item received in the exchange. However, New York’s policy will treat digital currency as intangible property, which is not taxable in sale or use. Therefore, the actual receipt of digital currency in a barter transaction is not treated as a taxable transaction. This is significant news and serves to reassure a burgeoning venture capital space that the purchase and sale of digital currency itself is not a transaction subject to state sales tax.
The Department further clarified that the exchange of digital currency for taxable goods and services will be subject to state sales tax. However, under the new policy, transactions involving digital currencies will be treated similarly to those utilizing U.S. dollars. If a party exchanges digital currency for a taxable good or service, the seller 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
- Report such sales and remit any sales tax due in U.S. dollars when filing its periodic sales tax returns
These obligations essentially mirror the sales tax requirements for sellers who exchange goods or services for U.S. dollars. Already there are several third-party payment processing systems that can record and convert digital currency transactions at the point of sale in exactly this manner. The Department’s policy is an encouraging signal to merchants willing to adopt digital currency as an acceptable method of payment.
Finally, the Department will follow the IRS’s lead and treat digital currency as property for corporate and personal income tax purposes. In April 2014, the IRS issued Notice 2014-21, in which it explained that digital currencies would be treated as property for federal tax purposes. While there is ample debate in the digital currency community regarding the practicality of this treatment, New York’s new policy at least adds a consistent piece to the developing regulatory framework.