On the heels of Internal Revenue Service guidance addressing the federal tax consequences of using “convertible virtual currency,” Notice 2014-21 (Mar. 25, 2014), the New York State Department of Taxation and Finance has released its own guidance on the issue in Technical Memorandum TSB-M-14(5)C, TSB-M-14(7)I, and TSB-M-14(17)S (N.Y.S. Dept of Taxation & Fin., Dec. 5, 2014). The Technical Memorandum defines “convertible virtual currency,” and outlines the Department’s policy regarding transactions involving convertible virtual currency for New York sales tax, corporation tax, and personal income tax purposes.
Convertible virtual currency. Consistent with the IRS Notice, the Technical Memorandum defines “convertible virtual currency” as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value,” that either “has an equivalent value in real currency, or that acts as a substitute for real currency.” The most commonly known convertible virtual currency is Bitcoin, a decentralized virtual currency that uses a peer-to-peer computer network to issue Bitcoins and account for transfers of Bitcoins. Currently, holders can use Bitcoins on a variety of websites as a form of payment similar to the U.S. dollar. For example, users may exchange Bitcoins to purchase products on Overstock.com and to pay a satellite television bill to DISH Network.
New York sales tax guidance. Although convertible virtual currency is often used as a substitute for other forms of currency, such as the U.S. dollar, according to the Department the payment of convertible virtual currency in exchange for goods or services is a barter transaction, and thus is treated under New York law as two separate transactions: (1) the sale of convertible virtual currency and (2) the sale of the goods and/or services received in exchange for the convertible virtual currency. With respect to the sale of the currency, no New York sales tax is due because, for New York sales tax purposes, convertible virtual currency is “intangible property” and the sale of such property is not subject to New York sales tax. However, with regard to the second transaction, if the goods and/or services transferred are subject to New York sales tax, sales tax must be paid based on the market value of the convertible virtual currency at the time of the transaction, as calculated in U.S. dollars. Further, if the seller of goods or services gives the convertible virtual currency user a sales slip, invoice, or receipt as part of the transaction, it must separately state the sales tax due in U.S. dollars on that sales slip, invoice, or receipt. Finally, a seller of taxable goods or services in New York that accepts convertible virtual currency must register for sales tax purposes and properly record and report its convertible virtual currency transactions in U.S. dollars.
New York corporation tax and personal income tax guidance. According to the Department, New York corporation tax and personal income tax laws conform to the federal treatment of convertible virtual currency outlined in Notice 2014-21. In that Notice, the IRS classified convertible virtual currency as property, and stated that the general tax principles applicable to property transactions will apply to transactions involving the exchange of convertible virtual currency. Therefore, a taxpayer who receives virtual currency as payment for goods or services must include the fair market value of the virtual currency in computing gross income.
Additional Insights. Now that some major companies have begun accepting Bitcoin payments on their websites, the tax treatment of sales transactions involving convertible virtual currency has received attention from tax commentators and the financial press. The Department has chosen to conform to the IRS’s classification of convertible virtual currency in Notice 2014-21, which concluded that under federal tax law convertible virtual currency is property, rather than currency. As such, for federal and New York State income tax purposes, basis in the virtual currency must be calculated upon receipt of the currency, and then that basis is used to determine gain or loss on any subsequent disposition of the currency.