Bitcoin Comes Under IRS and NY Scrutiny
The New York State Department of Financial Services (“DFS”) recently announced that it was issuing proposed regulations for the creation of a BitLicense—a regulatory framework for New York’s virtual currency businesses.
Under the proposed regulations, businesses which perform the following activities would be required to obtain a BitLicense and comply with the license’s various requirements:
• Receiving or transmitting virtual currency on behalf of consumers;
• Securing, storing or maintaining custody or control of virtual currency on behalf of consumers;
• Performing retail conversion services, such as converting dollars into virtual currency;
• Buying and selling virtual currency as a customer business; or
• Controlling, administering, or issuing a virtual currency.
If your business accepts Bitcoin or another virtual currency in exchange for the sale of goods or services only, it does not need to obtain a BitLicense. However, there are still federal tax implications for accepting virtual currency as payment.
In March, the IRS issued Notice 2014-21 to inform the public that, for federal tax purposes, virtual currency is treated as property. That means that any business which receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received. Therefore, any gain or loss upon an exchange of virtual currency for other property results in a taxable gain or loss.
Another important note for businesses is that the fair market value of virtual currency paid as wages is subject to federal income tax withholding, Federal Insurance Contributions Act (“FICA”) tax, and Federal Unemployment Tax Act (“FUTA”) tax, and must be reported on the employee’s W-2 form.
Both the proposed DFS BitLicense and the IRS’ notice show that Bitcoin and other virtual currencies will come under further regulatory scrutiny as they become more widely accepted. Already, companies as diverse as Dell, Subway, Victoria’s Secret and the Sacramento Kings NBA team accept Bitcoin as a form of payment. If your business already accepts or plans to accept virtual currency as a form of payment, you need to be aware of the evolving regulatory landscape and plan accordingly.
For questions about the DFS proposed regulations, the IRS notice or other legal implications of virtual currency, contact a member of MacDonald Illig’s Emerging Technologies Practice Group.
Under the proposed regulations, businesses which perform the following activities would be required to obtain a BitLicense and comply with the license’s various requirements:
• Receiving or transmitting virtual currency on behalf of consumers;
• Securing, storing or maintaining custody or control of virtual currency on behalf of consumers;
• Performing retail conversion services, such as converting dollars into virtual currency;
• Buying and selling virtual currency as a customer business; or
• Controlling, administering, or issuing a virtual currency.
If your business accepts Bitcoin or another virtual currency in exchange for the sale of goods or services only, it does not need to obtain a BitLicense. However, there are still federal tax implications for accepting virtual currency as payment.
In March, the IRS issued Notice 2014-21 to inform the public that, for federal tax purposes, virtual currency is treated as property. That means that any business which receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received. Therefore, any gain or loss upon an exchange of virtual currency for other property results in a taxable gain or loss.
Another important note for businesses is that the fair market value of virtual currency paid as wages is subject to federal income tax withholding, Federal Insurance Contributions Act (“FICA”) tax, and Federal Unemployment Tax Act (“FUTA”) tax, and must be reported on the employee’s W-2 form.
Both the proposed DFS BitLicense and the IRS’ notice show that Bitcoin and other virtual currencies will come under further regulatory scrutiny as they become more widely accepted. Already, companies as diverse as Dell, Subway, Victoria’s Secret and the Sacramento Kings NBA team accept Bitcoin as a form of payment. If your business already accepts or plans to accept virtual currency as a form of payment, you need to be aware of the evolving regulatory landscape and plan accordingly.
For questions about the DFS proposed regulations, the IRS notice or other legal implications of virtual currency, contact a member of MacDonald Illig’s Emerging Technologies Practice Group.