Cryptocurrency and sales tax
by May 12, 2024
Please note: This blog was originally published in 2022. It’s since been updated for accuracy and comprehensiveness.
This year’s income tax filing deadline has passed, and many first-time cryptocurrency investors found themselves scratching their heads when trying to determine how to handle cryptocurrency income and investments for filing purposes. The digital currency industry has taken off, and like most new technologies, there are plenty of questions in its wake. How is it being regulated? How should I report cryptocurrency income? And what about sales tax and cryptocurrency?
There are a few ways the cryptocurrency sales tax problem can come about. Did you purchase an item using virtual currency? Are you selling virtual currency like Bitcoin? Let’s walk through these examples.
Buying or selling cryptocurrency
Most states are still attempting to catch up to the virtual world and how sales tax should be handled on the purchases of digital items. When most sales tax laws were written, regulators were focused on tangible goods, not digital offerings like SaaS or cryptocurrency. Some states have determined that purchases of cryptocurrency are not subject to sales tax, while some have sales tax laws that allow for the taxation of intangible goods, including cryptocurrency.
The majority of states have not yet released cryptocurrency-specific sales tax guidance. However, for those that are in the industry of buying and selling cryptocurrency, it might be helpful to look at the state’s guidelines on the taxation of digital goods, as these states might use similar rules to determine if the buying and selling cryptocurrency is taxable going forward. We’ve compiled a list of state sales tax guidelines on digital goods here.
Purchase of a tangible item, using cryptocurrency
Let’s say you are selling a physical book, and the customer uses Bitcoin as their payment method. Is the amount of sales tax you charge dependent on the price of the book, or the current value of Bitcoin in dollars at the time of purchase? Since these are often two different numbers, how does a retailer know which to use to calculate sales tax?
It’s a good question, and the answer varies by state. In some states, including New York, the retailer would calculate the sales tax rate based on the fair market value of the cryptocurrency in dollars at the time of the sale. If the book is being sold for $10, and the customer uses Bitcoin as their payment method, you would calculate sales tax based on what the value of Bitcoin is for a $10 USD purchase, which is 0.00034 XBT (Bitcoin) at the time of this writing. For companies in New York that accept cryptocurrency payments, this would mean they need to maintain accurate records of the digital currency value at the purchase time for sales tax reporting purposes.
On the other hand, some states, like Washington, have announced that the sales tax rate does not vary even if the purchase is made using cryptocurrency. Instead, if the book is priced at $10, the sales tax rate is based on the retail price of $10.
Similarly, if you were to make a sale of a digital good like an NFT and the payment method was Ethereum, you’d have two questions to ask: Are digital goods like NFTs taxable in my state and do I use the Ethereum value or the retail price to calculate the sales tax rate?
Staying sales tax compliant in a changing landscape
As the world continues to change and evolve, retailers and state sales tax authorities will be forced to adapt as well. However, keeping track of the laws related to cryptocurrency, digital goods, and sales tax changes is an overwhelming amount of work, especially for a retail company focused on growth.
That’s where a sales tax solution like TaxJar can help. TaxJar makes sales tax compliance easier with a user-friendly dashboard and alerts that help you understand where you have sales tax obligations. Our team stays up to date with changing sales tax legislation so you don’t have to, and can instead focus on your company’s goals. Get started with a free 30-day trial of TaxJar today.
