Does Buying with Bitcoin Trigger Sales Tax?

EZTax.com blog writes: What is Bitcoin? It’s formally defined by the IRS as property, and defined by the U.S. Government and Accountability Office as a digital unit of exchange that is not backed by a government issued legal tender. In simple terms, Bitcoin is an unregulated virtual currency that people use to buy and sell things, primarily over the internet. As Bitcoin gains popularity, what are the tax implications of using this currency? Popular sites, such as Overstock.com, accept Bitcoin as payment for anything from bath towels to music. If these items were purchased with dollars, then sales tax would be triggered. So what is the tax implication of buying with Bitcoin?

Making purchases with Bitcoin does trigger sales tax according to California and Kentucky, but the rest of the states have not issued any formal guidance.  Generally, retailers that accept Bitcoin are required to collect sales tax on these transactions because they are still selling tangible personal property. However, there are no taxing jurisdictions that accept Bitcoin. That means that retailers will have to either remit the tax in dollars based on what Bitcoin is worth if they hold it, or convert the Bitcoin to dollars to pay sales tax.

Bitcoin’s value can fluctuate by hundreds of dollars per day because of supply and demand. So, how is sales tax calculated if a retailer sells something for $100 worth of Bitcoin earlier in the month, but when it’s time to remit sales tax later in the month that same Bitcoin is worth $500? The sales tax liability would be greater if the value of the Bitcoin increased and the retailer had not converted the Bitcoin to dollars at the time of the sale. For some sellers, it may be a good idea to convert the Bitcoin to US dollars immediately after the sale. That way the fluctuations in the Bitcoin market will have no effect on sales tax liability.

There are also ATMs around the country that allow customers to insert US dollars in exchange for Bitcoin.  Since the IRS defined Bitcoin as property, this looks like it could be an event that triggers sales tax at first glance. A customer is basically purchasing Bitcoin, and that is a sale right? Maybe it is, but Bitcoin is intangible personal property and many states still don’t impose sales tax on intangibles. For example, the Missouri Department of Revenue recently issued Letter Ruling 7411 holding that ATM transfers of Bitcoin do not trigger sales tax because it is intangible property.

For now, generally, buying property with Bitcoin does trigger sales tax (considering you have a sales tax obligation in that jurisdiction), but just buying Bitcoin does not.

There is a lot of discussion surrounding Bitcoin, and more anticipated in the next year if its popularity continues. We will keep you informed regarding its taxation!