Cryptocurrency and Tax Implications for Your Business

More and more American shopkeepers are starting to take Bitcoin, and other cryptocurrencies as payment as the global popularity of digital currencies continue to grow. Some people use it to cover their business costs. If your company has begun accepting Bitcoin or another cryptocurrency as payment or is considering doing so, you should be aware of the financial and legal implications of doing so.

What effects does accepting cryptocurrencies as payment for goods or services have on taxes?

Cryptocurrency is not treated the same as fiat currency by the IRS for purposes of reporting business income. Cryptocurrency is not recognized as legal tender by the Internal Revenue Service. Instead, it’s something you own. To the extent that a business receives the fair market value of cryptocurrencies used as payment for products or services, such payments are regarded as ordinary income and are, therefore, subject to income taxes, including self-employment tax. Also, using crypto funds to pay for business expenses creates a taxable event for the business owner, just as if the business owner had received and kept the crypto in a “wallet.”

Do I need to exchange my bitcoin for dollars right away?

To put it succinctly, “it’s a good idea.” When a company receives cryptocurrency as payment, it must immediately record the transaction as income at the cryptocurrency’s fair market value as of the day it was received. You are not legally required to convert the cryptocurrency into U.S. dollars immediately. Don’t, and the value of the cryptocurrency rises. When you file your taxes, you convert them back into dollars or use them to pay for business expenses and when you originally earned money. In the event of a decline in value prior to conversion, declaring the resulting loss can be a tedious process. It’s important to remember that different cryptocurrency exchange services may place different values on your transactions. Business owners should be consistent with the exchange they use to reduce the likelihood of an audit by the Internal Revenue Service (IRS).

It’s also essential to know that cryptocurrency transactions are instantaneous and final. Therefore, the transaction is final and cannot be canceled if you accept cryptocurrency as payment. If a customer overpays you in cryptocurrency, or if you mistakenly overcharge a customer and don’t realize it until after they’ve paid, there is no easy way to issue a refund or make a change. The final option is to pay the customer in cryptocurrency, which could result in a taxable event for both parties.

What are the tax repercussions of bitcoin ownership?

For tax purposes, your company must pay ordinary income taxes on cryptocurrency at the fair market value on the date it is received, as mentioned above. Waiting to convert cryptocurrency received from customers into dollars (or using cryptocurrency received to pay business expenses) until a later date requires you to calculate whether the cryptocurrency appreciated (went up in value) or depreciated (went down in value) since you first received it. That’s because any appreciation in value will be subject to capital gains taxation. If the value of your cryptocurrency drops, you will incur capital losses. Your cryptocurrency gains or losses should be reported as short-term if you held them for less than a year before selling them or using them to pay for personal expenses.

Long-term capital gains tax rules and lower capital gains tax rates apply if the holding period is more than a year. The good news is that, like with other investments, cryptocurrency capital losses can be offset by other realized capital gains.

How do I prepare for tax season when I have cryptocurrency?

Finally, all taxpayers are expected to keep records that adequately support the information provided on tax returns. When dealing with customers who pay with cryptocurrency, stores should always record the current market value of the cryptocurrency at the time of purchase or sale.

For tax purposes, keeping a detailed record of all cryptocurrency purchases and sales is helpful.

For each cryptocurrency wallet used by your company, you should record the following details in your transaction log.

The date you received the cryptocurrency.
A description of what currency was received.
The number of units received, sold, or exchanged.
The U.S. dollar value of the crypto payments at the date and time of receipt.
Cryptocurrency-related fees, including exchange fees, may be deductible as ordinary and necessary business expenses.
The cryptocurrency’s fair market value on the date used (in order to calculate your gain) is if you used it to pay business expenses rather than exchange it.
The cost of the transaction you were paid for and the goods or services your customers paid for using cryptocurrency.

You shouldn’t just keep your crypto log and any supporting documents like statements or receipts. To properly report earnings on W-2 forms at year’s end, businesses that pay employees in Bitcoin or another cryptocurrency must record the cryptocurrency’s fair market value on the date that each payment was made.

How do you report crypto revenue and losses to the IRS?

Your cryptocurrency earnings should be reported just like any other cash income. Schedule C of IRS Form 1040 is commonly used for this purpose by business owners. You must file IRS Form 8949, “Sales and Other Dispositions of Capital Assets,” if you received and held cryptocurrency that resulted in a gain or loss. Schedule D of Form 1040 is where you will detail your capital gains and losses, as well as any tax breaks you might be qualified for. If your capital losses from cryptocurrency investments are higher than your capital gains, you can use the difference to offset your other types of income up to $3,000. It is possible to roll over any unused portion of your crypto capital loss into the following tax year. Accepting cryptocurrency as payment from customers or spending it on operational costs presents its own complications for small businesses already struggling to comply with the tax regulations governing their operations. If you need assistance with your taxes, you can get it. Consult a low-cost lawyer from the Rocket Lawyer network to learn more about how cryptocurrency may affect the tax picture for your small business.

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