What are the tax implications of accepting cryptocurrency as payment for goods or services?
In the eyes of federal tax authorities, cryptocurrency received as revenue in the course of doing business is not considered the same as regular currency. According to the IRS, cryptocurrency is not actually considered legal tender. Rather, it is considered property.
When a business accepts cryptocurrency as payment for goods or services, the fair market value of crypto payments received is considered ordinary income subject to income taxes, including self-employment tax. Furthermore, if a business receives and holds cryptocurrency in a digital currency wallet and later uses cryptocurrency to pay business expenses, the act of using crypto funds to pay bills creates a taxable event for the business owner.
Do I have to convert cryptocurrency into dollars immediately?
The short answer is it’s a good idea. When a business accepts cryptocurrency as payment for goods and services, the transaction must be recorded as income using the fair market value of the cryptocurrency on the date of receipt.
You are not obligated to exchange or convert the cryptocurrency into U.S. dollars immediately. However, if you hold it and the value increases, you could owe both income taxes and capital gains taxes when the cryptocurrency is eventually sold, exchanged, or used to pay for expenses. If the value decreases before you convert it, reporting the loss can be more complicated.
Be aware that there can be differences between cryptocurrency exchanges in how they value transactions. It’s important for business owners to be consistent with the exchange used to reduce the likelihood of questions from the IRS.
Cryptocurrency transactions are also irreversible. If your business accepts crypto payments, the sale is final and cannot be reversed. If a customer overpays, or if you need to issue a refund, any repayment made in cryptocurrency may itself create a taxable event.
What are the tax implications of owning cryptocurrency?
Your business will owe ordinary income tax on the fair market value of cryptocurrency received on the date of payment, regardless of when you exchange it for U.S. dollars.
If you hold the cryptocurrency after receiving it, you may have a capital gain or loss depending on whether the value increased or decreased before you used or sold it.
- Cryptocurrency held less than one year before sale or use is subject to short-term capital gains rules.
- Cryptocurrency held more than one year is subject to long-term capital gains rules, which generally have lower rates.
If the cryptocurrency loses value, you can deduct capital losses against other capital gains, just as with other investments.
How do I prepare for tax season when I have cryptocurrency?
The IRS requires all taxpayers to maintain records supporting information reported on tax returns. Businesses that accept cryptocurrency should keep accurate, up-to-date records showing the fair market value of cryptocurrency when it is received, exchanged, or used for payments.
Your crypto transaction log should include:
- The date you received the cryptocurrency.
- A description of the cryptocurrency received.
- The number of units received, sold, or exchanged.
- The U.S. dollar value of the cryptocurrency at the date and time of receipt.
- Any fees paid, including exchange or transaction fees.
- The fair market value on the date used, if used to pay business expenses.
- The goods or services provided for the crypto payment.
Keep all related statements and receipts to substantiate these records.
If you pay employees using cryptocurrency, you must report the fair market value on the date each payment is made to accurately report compensation on W-2 forms.
How do you report crypto revenue and losses to the IRS?
Report cryptocurrency revenue in the same way as other business income. For many small business owners, this is done using Schedule C of IRS Form 1040.
If you had gains or losses from holding cryptocurrency, report them on IRS Form 8949 (Sales and Other Dispositions of Capital Assets), and summarize them on Schedule D of Form 1040.
If your crypto capital losses exceed your gains, you can use up to $3,000 of the excess losses to offset ordinary income. Any remaining losses can be carried forward to future tax years.
Cryptocurrency adds an extra layer of complexity to small business recordkeeping and taxes.
If you have questions about the legal or recordkeeping aspects of accepting cryptocurrency, consider consulting a qualified business attorney for personalized guidance.
Please note: This page offers general legal information, not but not legal advice tailored for your specific legal situation. Rocket Lawyer Incorporated isn't a law firm or a substitute for one. For further information on this topic, you can Ask a Legal Pro.
