May 2018 JD Supra
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Everyone wins when accepting Virtual Currency as Payment… was published by JD Supra on 5/8/18.

Accepting Virtual Currency (VC) as payment for goods and services is growing.  States like Arizona and Georgia have introduced bills that would allow Taxpayers in those states to pay their taxes with VC.  Two of the Big 4 Accounting firms (EY and PwC) are accepting Bitcoin as a form of payment for their services.  VC holders can currently pay for many things with their VC:  ranging from a Subway sandwich to Burger King (some franchises), taking taxi cabs rides in Argentina, lottery tickets in Minnesota or New Hampshire, books, supplies and gear at the Harvard and MIT Coop Stores, making donations to Autism Speaks or a Tesla.  On line giants like Microsoft, Overstock, Shopify and Expedia also accept Bitcoin as a form of payment.     

How and Why do Big Merchants or Small Business owners accept VC as a form of payment? t?

While VC market values are volatile, accepting it as a form of payment is not difficult and entities accepting VC as a form of payment don’t have to expose themselves to exchange rate risk.  There are secure on-line platforms (such as Coinbase, BitPay) that provide VC buying, selling, transferring, and storing services.  These on-line digital asset exchanges provide Merchants and possibly soon – Taxing Authorities – with the ability to obtain an “instant exchange”; eliminating conversion and timing issues that an entity (customer) accepting VC as payment could potentially experience.   

Once the exchange rate risk component of a VC exchange is eliminated, accepting VC as a form of payment can be perceived as a client accommodation, convenience factor, differentiator from the competition or just simply – getting your name out there.   

There is also a potential transactional benefit to accepting VC.  The transaction fees for Credit Cards range from 2% to 3%.  Transactions costs associated with VC (if applicable) can be as low as 10 basis points (1/10 of 1%). 

Why would “States” consider accepting VC as a form of payment?

Accepting VC as a payment method is a convenience factor for the Taxpayer and another way to collect tax revenue for a State. States considering accepting VC as payment for taxes ought to make sure that they have systems in place to accept VC and instantly convert the tax payments to US Dollars (eliminating rate conversion risk) for crediting the Taxpayer’s account. 

It is relatively simple to accept VC as payment.  How about initiating payments with VC?

VC holders can execute payments to merchants, charities and possibly Taxing Authorities utilizing on-line wallets.  VC is treated and viewed as “property” by the IRS and not “currency”. VC holders ought to keep a very close watch on their potential short-term capital gains (realized gain if VC is held for one year or less) or long term capital gains (realized gain if VC is held for more than a year) before being used as a medium of exchange.  Net short-term capital gains may be treated as ordinary income for tax purposes; taxed at the Taxpayer’s highest marginal federal income tax rate.  If a VC holder experiences a loss, net capital loses are capped at $3,000 a year.   For example, if a VC holder purchased VC at $1,000 and then used it to pay a tax bill (or any other merchandise) for an amount greater than the $1,000 – the difference – would be ordinary income if the VC was held for one year or less or a long-term capital gain if the VC was held for more than one year. IRS and States will be looking for their share of taxes on those “capital gains” and VC holders have the responsibility to report their gains annually. 

So, does everyone really win with paying and or accepting VC?

Despite the fact that VC investors are subject to capital gains tax, reporting and recordkeeping requirements when investing in VC, one must acknowledge that VC has behaved like the stock market.  Many VC investors have realized significant “appreciation” in their VC investment and many have not “cashed-in” their gains. 

Paying with VC and accepting VC as a form of payment provides convenience to end users and providers.  Moreover, the rate risk fluctuation associated with exchanging VC to currency is mitigated. The entities accepting VC as a form of payment don’t have to expose themselves to an exchange rate risk. 

Perhaps in the future, VC will become more of a “standard” for exchange. Others presently view VC as a way of the present and not a way of the future.  For instance, Germany recently published Government guidance that Germany will NOT tax VC when used as a form of payment.  Meaning, Germany will treat VC as the equivalent to “legal tender” for tax purposes (as opposed to property like the US) when it is used as a means of payment. 

Don’t be a victim of your own making.  If you a VC investor, or if you are considering accepting VC as a form of payment, consult your tax specialist.