BTC and Taxation: A Guide for Merchants


In spite of their many advantages, bitcoin wallets can be a bit troubling when tax season rolls around. Currently, the Internal Revenue Service (IRS) advises taxpayers to treat cryptocurrency as property rather than cash, and that has a range of tax implications. If you are a merchant who accepts bitcoin, here's what you need to consider about taxation:

Merchant Payments

If you accept bitcoin for a purchase, you have to report that purchase, just as you would report a purchase made with any other currency. The amount you should report is the exchange value of the cryptocurrency the day you accept it.

For the most accurate reporting, you should use the same daily exchange rate for all of your transactions. For example, merchants should not use a low exchange rate to calculate the value of their merchandise and a high exchange rate to calculate their payments received as this formula artificially deflates their income and reduces their tax burden.


Bitcoin Paychecks

If you use your bitcoin wallet to pay your employees, contractors or service providers, you must follow the standard reporting protocol for these payments.

For example, if you pay employees in BTC, you have to pay taxes and file a W-2 on their behalf. If you pay contractors or service providers, you need to issue a 1099, using the BTC to USD exchange rate valid on the day the payments were made.


Capital Gains and Losses

If you have cryptocurrency that increases in value while you hold it, you need to report any gains made when you sell that digital currency. Small gains are usually taxed as income, just as interest from a small savings account would be.

However, large gains in bitcoin value doesn't have to be taxed at your income tax rate. Instead, it can be taxed at the lower capital gains rate. Unfortunately, you can only write off losses equivalent to $3,000 or less.

Merchants who accept a lot of bitcoin and especially those who have multiple virtual currency transactions to consider should consult with an accountant, particularly one experienced with cryptocurrencies. It's also important to remember as bitcoin becomes more prominent, the IRS may change some of these rules.


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