Bitcoin For Merchants
Lesson 4: Accounting, Tax, Legalities
Transcript of video lesson
Link to Lesson
Welcome back to Bitcoin For Merchants, an original Coin Academy course. This is the final lesson on the course entitled “Accounting, Tax, and Legalities”. We’re going to really hit the high points here because there’s so much variation from country to country. It’s hard for us to cover these in any kind of comprehensive fashion. But really we do also need to start with a general disclaimer.
This is an area of the law and area of the Tax Code that is really in flux at the moment. A lot of countries are just now figuring this out. Others haven’t even dealt with it yet. This is certainly going to evolve. It’s going to change a lot, possibly dramatically in the next 12 -24 months as the EU announces rules and regulations, as Australia comes down finally with firm rules and regulations, and other countries that haven’t even dealt with the topic start to come to groups with this new paradigm.
I do need to say that we’re not offering legal or tax advice nor do we hold ourselves as experts in these areas. We’re really providing this information as an educational service. We do strongly advise that you speak with your tax planning team and your legal counsel to get opinions on how to approach these issues. You need to consider the country of residence, your business status and nature, and your particular personal tax needs as well. Now that we have the disclaimer done, let’s move on.
Big question – is Bitcoin legal in your country? This is a chart from Wikipedia. It is current as of late August 2014. The green countries have ruled that Bitcoin is in fact illegal to own and to use. The red countries have said that it’s illegal. The yellow countries we’re not sure about. And the gray countries have not offered any sort of guidance at all. The good news is, certainly the vast majority of the world’s population centers except for China and India have come down firmly on the side that Bitcoin is legal to own and use. It does not mean that they say it’s legal tender currency. No it doesn’t. That’s a totally different issue entirely and we’ll get to that in just a moment. But possessing Bitcoin, using it in transactions if you find someone who will accept it, is not going (either party) into trouble in any of these countries.
Let’s talk about Taxation. This varies by taxing entities so how the UK handles it versus the US versus Indonesia versus Australia. We can’t say with certainty at this point in time. Very few taxing entities have issued firm guidance on this. But so far, what we’ve seen is that it’s not as complex as many people think it is. In many cases, Bitcoin is treated as foreign exchange (as foreign currency) and it’s managed on an accounting and taxation level in terms of gain and loss, as foreign currency gain and loss.
In other countries, they’re categorizing Bitcoin as capital or as property, not as legal tender. In which case it’s accounted for as capital gains or capital loss, as the case may be. This makes it essential for you as a company accepting Bitcoin in your business to track exchange rates at the time of acquisition of Bitcoin and at the time that you dispose of or exchange the Bitcoin because you have to calculate gain and loss generally by the value of the Bitcoin at the time it was acquired versus the time that it was disposed of.
Really this is more of an accounting process issue than a complex taxation problem as in the example I gave points out. If you have good accounting process in place and you track key data, this is completely manageable when tax time rolls around.
Let’s look at Taxation issues in the US as the IRS have issued some firm guidelines in terms of how Bitcoin is to be treated. They’ve stated that it will be treated as property, not as currency and this came out March 2014. Gains and losses on Bitcoin are only recognized when you cash them in or you exchange them for goods or services. Businesses that accept Bitcoin in payment for their goods or services must report gross income, based on the fair market of the Bitcoin when it was received for those goods or services, so you have to track what was the Bitcoin worth at the time I received it in payment.
If you are making purchases with Bitcoin, they’re going to incur a taxable gain if the fair market value of the property you purchased exceeds the adjusted basis in the Bitcoin exchange. Similarly, they will incur a loss if the value of the items that you purchased was less than the adjusted basis value of the Bitcoin exchange. Again it’s all about tracking the value at the time the exchanges occur.
Wages are another issue. Wages paid to employees in Bitcoin are taxable to the employee, and the tax rate will be based on the fair market value at the time that they received those wages.
Let’s take a look at how accounting can be managed to keep this at a reasonable level of difficulty for people. For a merchant actively transacting in Bitcoin, the simple solution, honestly, is to implement a point of sale system that provides conversion data and a record of transactions. Given the cost of these point of sale solutions, this is really the best way forward and by far the cost/benefit on this, tremendously favours implementing one of these systems. It simply takes the whole headache out of your hands. You have good records now for valuations, prices, fair market value at the time transactions occur. It’s really the way to go and I can’t strongly recommend that enough.
If, on the other hand, you insist on using a manual system, if you’re transaction value for example or your frequency is very low, you need to set up a spreadsheet at least to capture the following sales data: capture the date of the sale, what item was sold, the price of that item in national currency, the amount that was paid for that item in Bitcoin, the present value of the Bitcoin at the time this transaction occurred, and then you can calculate your gain or loss.
Similarly, if you are making purchases with Bitcoin, you need to set up that spreadsheet and capture similar set of items: the date, what item was purchased, the price of that item in national currency, the amount you paid for that item in Bitcoin, the value of the Bitcoin at the time you made the purchase, and then from there you can calculate your gain or loss. If you do this, your accountants are going to thank you and you’re going to make tax time a much easier exercise.
Now, that’s all we have to say in this lesson. I realize that probably I didn’t dive deeply enough for some of you. There’s a good reason for that which is simply that, there’s so much variation in the rules and regulations by jurisdiction at this point in time, it’s really not possible for us to get comprehensive coverage of this without having a massive course. And frankly, it’s changing so quickly we’d be constantly updating the course.
I thank you for your time. Good luck. I hope you found this to be useful.