Companies that accept cryptocurrencies as payment for products and services must be aware of and adhere to IRS regulations. Further information may be found here.
What you’ll discover:
What are the tax consequences of accepting cryptocurrencies in exchange for products or services?
Do I have to transfer my cryptocurrencies to cash right away?
What are the tax consequences of cryptocurrency ownership?
When I have cryptocurrencies, how do I prepare for tax season?
How do you declare cryptocurrency profits and losses to the IRS?
As Bitcoin gains traction throughout the globe, more small business owners in the United States have started to accept it as payment for products and services from their consumers. Others even utilize it to cover their own company costs. If your small company has begun to take, or is contemplating accepting, Bitcoin or any other kind of cryptocurrency as payment, it is critical that you understand the possible business and tax ramifications of this sort of revenue.
Table of Contents
What are the tax consequences of accepting cryptocurrencies in exchange for products or services?
Cryptocurrency received as income in the course of conducting business is not treated the same as ordinary cash by federal tax authorities. The IRS states that bitcoin is not recognized lawful cash. Rather, it is regarded as property.
When a company takes bitcoin as payment for products or services, the fair market value of the cryptocurrency payments is considered ordinary income subject to income taxes, including self-employment tax. Additionally, if a firm receives and stores cryptocurrencies in a digital currency “wallet” and then uses bitcoin to pay business expenditures, the act of paying bills with cryptocurrency constitutes a taxable event for the business owner.
Do I have to transfer my cryptocurrencies to cash right away?
“It’s a good concept,” is the concise response to this inquiry. When a company takes bitcoin as payment for products and services, the transaction must be promptly reported as revenue using the cryptocurrency’s fair market value on the day of receipt. Theoretically, you are not required to instantly swap or convert the Bitcoin into US dollars. Nevertheless, if you do not do so and the value of the cryptocurrency rises, you may find yourself having to pay both income taxes and capital gains taxes when the currency is eventually changed into dollars or used to pay for company expenditures. If the value falls before you convert it, calculating the loss might be difficult.
Bear in mind that the way various bitcoin exchange providers value transactions may vary. To lessen the risk that the IRS would question your method, company owners should be consistent with the exchange utilized.
It is also critical to realize that bitcoin transactions are irreversible and occur extremely instantly. Hence, if your company accepts bitcoin payments, the transaction is final and cannot be reversed. There is no straightforward method to issue a refund or create change if your consumer pays you too much in cryptocurrencies, or if you unintentionally charge them too much and don’t notice it until after they have paid. Finally, you may make a bitcoin payment to the consumer, however this may result in a taxable event for both you and the customer.
What are the tax consequences of cryptocurrency ownership?
As previously stated, regardless of when you choose to swap the bitcoin, your firm will owe ordinary income taxes on cryptocurrency received based on the fair market value on the date received. If you do not immediately convert bitcoin received from business customers into dollars but do so later (or opt to utilize the cryptocurrency acquired to cover business expenditures later), you must assess whether the cryptocurrency appreciated (went up) or depreciated (went down) in value. This is due to the fact that you will be taxed on the amount of increase. If the value of the cryptocurrency falls, you will suffer capital losses.
You must record short-term profits or losses if you had your cryptocurrency for less than a year before trading it or using it for personal payments. Long-term capital gains tax laws and reduced capital gains tax rates apply if the holding period lasted more than a year. The good news is that, like other forms of investments, you may deduct bitcoin capital losses against other realized capital gains.
When I have cryptocurrencies, how do I prepare for tax season?
Finally, the IRS requires all taxpayers to keep records that adequately support the information on tax returns. Companies that take cryptocurrencies must retain accurate and up-to-date records demonstrating the fair market value of bitcoin when it is received, traded, sold, or used for payment.
Maintaining a careful record of your bitcoin transactions will assist you in preparing for tax season. As a recommended practice, your cryptocurrency log should include the following transaction details for each cryptocurrency wallet used by your company:
When you got your cryptocurrency.
A breakdown of the currency received.
The total number of units received, sold, or traded.
The crypto payments’ US dollar value at the moment and date of receipt.
Costs spent for bitcoin, including exchange fees, may be deductible as regular and necessary business expenditures.
If you utilized it to pay company expenditures rather than swap it, the fair market value of the cryptocurrency on the date used (to compute your gain).
The cost of the transaction for which you were paid, as well as the items or services purchased with cryptocurrency by your customers.
In addition to your crypto record, you should save relevant statements and receipts to back up the log. Moreover, if you pay workers using Bitcoin or another cryptocurrency, you must record the fair market value of the cryptocurrency on the day each payment was received in order to appropriately report compensation on W-2 forms at the end of the year.
How do you declare cryptocurrency profits and losses to the IRS?
You should record crypto income in the same manner you report conventional cash revenue. This is done by many small company owners utilizing Schedule C of IRS Form 1040.
Whether you made a profit or a loss as a result of receiving and holding cryptocurrencies, you must record the transactions on IRS Form 8949 — Sales and Other Dispositions of Capital Assets. Next, on Schedule D of Form 1040, you will describe your capital gains and any deductible capital losses. If your crypto capital losses exceed your crypto capital profits, you may deduct up to $3,000 of the excess losses from your regular income. The remaining crypto capital losses will be carried over to the next tax year.
Small company tax requirements are complicated enough without adding the complications of accepting cryptocurrencies from consumers or utilizing cryptocurrency to pay for business expenditures. Luckily, Tax Legal Assistance is accessible when you need it.