Cryptocurrency Taxes and Your Business

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If it hasn’t happened yet, rest assured that it will. Sooner or later, a customer will want to pay you in cryptocurrency, or an employee is going to ask to be paid in Bitcoin or some other cryptocurrency. If like many southern California small business owners, you haven’t completely wrapped your head around crypto and what it is, it’s time you learn. Otherwise, Uncle Sam and the IRS will teach you how cryptocurrency affects your business taxes, and they don’t grade on a curve.

What Is Crypto? 

The IRS identifies it as convertible virtual currency. It is convertible because it has a real money value, and anything with real money value is subject to taxation. Crypto is a digital payment system that does not rely on banks, or other third parties like governments, to verify payments. Instead of banks, Your cryptocurrency is kept in electronic wallets. Payments are made wallet to wallet and recorded on public ledgers called blockchains. Now here’s the kicker. Crypto, like any currency, can be traded. That means the real currency value of crypto may vary from its value when you acquired it. Cryptocurrency has a history of dramatic increases and decreases in real dollar value. Consequently, blockchains can be viewed both as a bank and a stock exchange simultaneously. Investing in crypto is done entirely without any rules or regulations, and that’s one of the attractive features of the currency. However, recently, President Bident ordered a study to see how best to bring a sheriff into the wild, wild west of existing cryptocurrency. While you can hide cryptocurrency like you can hide cash payments, it is against the law, and the IRS takes tax evasion very seriously.

How Is Crypto Taxed In Business?

If your business receives payments for goods or services in the form of cryptocurrency, or if the company is holding crypto as an asset, then it is taxable. Not only is it taxable, but it creates a potentially burdensome record-keeping issue as well. This is because cryptocurrency tax treatment depends on receiving, using, or holding it. The IRS published Revenue Ruling 2019-24 that details taxation of crypto, but generally speaking:

  • Crypto received as payment is treated as ordinary income. However, each payment has to be recorded in its real dollar value as of the date it was received.
  • If the business holds crypto as a capital asset, it is treated as property for tax purposes. Again, the real dollar value at the time of acquisition is the base number. Should you sell or trade the crypto, its value at the time of that transaction will be used to calculate a capital gain or loss.
  • If you pay an employee with crypto, it needs to be converted to real dollar value when it is paid to determine payroll taxes. W-2 forms also have to be reported in real dollar amounts. 

It’s a brave new world, and crypto will play an important role as the public (and businesses) become more familiar with and willing to accept money that is not a greenback. However, when you consider the extensive use of electronic payments, crypto is not that big a stretch.

Cryptocurrency And Your Business

So will you be ready? What is your Crypto strategy? If you are a small business owner in Southern California, contact the professionals at ASCEND Business Advisory for assistance in current crypto taxation issues and to prepare for expanded use of the currency.  ASCEND Business Advisory is a division of William Rogers Company.