By: T. Steel Rose, CPA | Coming to a technology client in the near future, if it hasn’t happened already, will be revenue and expenses paid in Dwollas or some form of cyber currency like Bitcoins. Dwollas are a simplified ACH transaction and translate dollar for dollar with a much lower merchant fee deducted from the vendor’s funds. Bitcoin, on the other hand, is one of several new cyber currencies. There is a great deal to investigate about bitcoin’s origin four years ago and their investment value. However the purpose of this article is to focus on how to recognize them on financial statements and tax returns at the right value.
The Bitcoin wiki explains Bitcoins as such:
“When a customer makes a payment, you might simply issue a credit to their account. Ideally, you want to enter it in a way that suggests you received a payment. You could consider entering it as a “discount”, but you may want to consider whether this inappropriately disguises the nature of the transaction. If on the other hand, you're giving “discounts” for Bitcoins, but then you are selling the Bitcoins for currency and then counting that as income, then chances are good that your calculation of income is making up for it. Ask your accountant.
“As for how to decide what a Bitcoin transaction is worth...the IRS, as far as we know, has never issued a guide mentioning how to value Bitcoin transactions. But they probably have rules and guidelines on how to value transactions made in foreign currency or ‘cash equivalents’. We imagine the accounting would be similar.”
Since the bitcoin wiki is depending on accountants, it will help to know the fundamentals of helping clients account for Bitcoin receipts and payments.
“With Bitcoins, there is likely to be some difference between the value of BTC [Bitcoins] when you received them as payment, versus when you go to exchange them for another currency like USD, should you decide to do so. This scenario, likewise, would be no different if you accepted foreign currency or gold as payment. Under some scenarios, it might make sense to book the dollar value of BTC income as it is received, and then to book any difference incurred when it is exchanged for fiat currency [US dollars in this example]. Under others, it might make sense to book the whole thing at the time of exchange.
“Perhaps you might talk to your accountant. You don't need to get into a discussion with your accountant about block chains and private keys or the philosophy behind a decentralized currency. By comparing the fundamentals of Bitcoins to accounting concepts already well understood by the public, you can probably get all the answers you need. What would you ask your accountant if you decided that you wanted to accept Berkshire Bucks or 1-ounce gold coins as payment?”
Bitcoins are accepted as payment on a growing number of websites worldwide. Recently coffee shops in Vancouver and in New Orleans began accepting the new currency. When it comes to receiving payment over the Internet, PayPal represents an improvement over retrofitting MasterCard and Visa transactions. Now, Bitcoins and Dwollas represent another technological advance toward frictionless transactions. Just as clients who accept PayPal need guidance from their accountants, so do clients who accept Bitcoins.
This guidance is offered by Bitpay.com which is a company utilized to help merchants accept Bitcoins.
“For “U.S. Reporting, when the exchange rate gain is $200 or less and it is a personal transaction, then the gains need not be claimed - Sec 988 (e) - Application to individuals.”
There is a Report of Foreign Bank and Financial Accounts (FBAR) filing requirement for financial accounts in a foreign country when the aggregate value of the accounts exceeded $10,000 at any time during the calendar year. There is the likelihood that this requirement applies to Bitcoins or USD funds held in non-US Bitcoin exchanges or wallet services. An additional topic that may have a connection to Bitcoin is the Foreign Account Tax Compliance Act (FATCA) filing requirement in the U.S.”
The Cryptocurrency Legal Advocacy Group (CLAG) has published memorandum detailing aspects of income taxation in the U.S. regarding Bitcoins.
“You are responsible for determining any and all taxes assessed, incurred, or required to be collected, paid, or withheld for any reason. You also are solely responsible for collecting, withholding, reporting, and remitting correct taxes to the appropriate tax authority.
“If in a given calendar year (i) more than $20,000 in gross amount of payments and (ii) more than 200 payments, will report annually to the Internal Revenue Service, as required by law, your name, address, tax identification number (such as a social security number, or employer identification number), the total dollar amount of the payments you receive in a calendar year and the total dollar amount of the payments you receive for each month in a calendar year.”
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