Money, Small Law Firms, Tax Law

Yes, You Have To Pay Taxes On Your Bitcoin

Before you start accepting Bitcoin for services, here are some other things to keep in mind.

By  
on

If something is too good to be true, it probably is. Is there such a thing as a free lunch? Not without having to sit through a boring, time-sucking presentation, or spending an entire lunch having someone you’d probably rather not be around pitch to you (or even worse, hit on you). What about free products like Facebook? Well, there’s an old adage: if you’re not paying for the product, you are the product. Put another way, the cost of the product is your information and your privacy. What about free money? Probably not, but let’s discuss.

Many of us who work in the cryptocurrency space accept Bitcoin or Ether for payment. I didn’t start allowing clients to pay me in Bitcoin until earlier this year, and it wasn’t a conscious decision. A client owed the firm money for back services, and said we could get it in Bitcoin right away or wait a few weeks until the CEO got back into the country. I’m a big believer that a bird in hand is worth two in the bush, so I told the CEO to pay us right away however she could. We got the Bitcoin, which promptly doubled in value one month later.

Wow, free money! Yeah, I guess. With the appreciation in the price of Bitcoin between when they paid me and now, I can go crazy on Overstock.com or the local coffee shop that accepts Bitcoin. I could, say, just blow it all on kitten oven mitts. Right? Right??

Well, no. Most of it, sure, but not all of it. Why not?

Taxes! Ugh. I am sorry to report that the news of the unregulated nature of cryptocurrencies has been greatly exaggerated. The Treasury Department has unambiguously stated that cryptocurrencies such as Bitcoin are considered property. See the IRS’s Virtual Currency Guidance, released way back in March 2014. Did the fact that we have to pay taxes on property influence their decision? Mmm, maybe. But regardless, my former employer has stated that Bitcoin and other cryptos are property, and it really doesn’t matter if other branches of government (hello, judiciary) disagree. Thus, taxes must be paid on any increases of the value of your Bitcoin or other virtual currency holdings.  (If you need a primer on ordinary income v. capital gains, see this webpage.) If you are holding onto your Bitcoin, you should probably give your accountant a heads-up next April that for 2017 you’ll have some gains to report. It doesn’t matter if you haven’t sold any of your Bitcoin, or even if for some reason the price of Bitcoin goes down in 2018 between January and when you file your taxes.

By the way, the taxes issue can be obviated if you sell all of the Bitcoin you receive right away. But with Bitcoin going from $997 on Jan. 1 to $4,667 as I type this, why would you want to sell right away? Unless the rest of this column scares you off, which honestly it shouldn’t.

Maybe that large jump in the value of Bitcoin this year motivates you to look beyond the taxes issue, and perhaps just telling people that you accept payment in Bitcoin (and even hold onto a portion of it) gives you some cachet in the cryptocurrency space and makes it worth it. I hear you: I feel the same way. When we send clients payment options, Bitcoin is listed right along PayPal and our wiring instructions.

Sponsored

Before you start accepting Bitcoin for services, here are some other things, aside from the tax issue, to watch out for or to keep in mind.

First, with all due respect to my ICO clients, honestly, I wouldn’t recommend accepting any cryptocurrency for payment other than Bitcoin or Ether, at least right now.

Second, don’t accept Bitcoin and claim that what you really received was cash. Things have a way of bubbling to the surface. My firm’s billing software allows us to set up different accounts to indicate where incoming money goes (it used to be just the operating account or the trust account), and we have an account for our Bitcoin payments to allow us to track what was paid when, so at the end of the year we’ll be able to determine the appreciation.

Third, don’t be exchanging money for people, because that might run you afoul of the money transmitter laws.

Fourth, if you’re in a state that has passed cryptocurrency-related legislation, you’ll need to familiarize yourself with whatever legislation has been passed. You’re probably okay if you’re just accepting Bitcoin for payment, but you can never be too careful. And, you’ll have to start paying attention to this stuff, even if your practice is wholly unrelated to cryptocurrency licenses.

Sponsored

Fifth, if you’re an attorney, don’t accept it as a retainer. Since the price of Bitcoin is volatile, a question can arise as to when the Bitcoin is being valued. If I’m paid $2,500 in Bitcoin on June 1 as a retainer and don’t do the actual work until September, am I looking at what was paid back in June as $2,500 even, or as a set percentage of a Bitcoin? No matter what my engagement letter may say, how is my client going to look at it?

Next, though as of this writing there is no prohibition at the federal level on paying employees in cryptocurrency (though the IRS did explicitly state all wages paid in cryptocurrency are subject to federal income tax withholding and payroll taxes), I always recommend that employers limit cryptocurrency payments to bonuses only.  If the price of the cryptocurrency should suddenly drop to nil, the employer could theoretically be subject to a wage & hour claim.

Lastly, no one knows what the future holds, so plan accordingly. I’m very pro-Bitcoin, and yet I regularly sell off some of the Bitcoin we receive, so that our Bitcoin holdings stay below a certain percentage of our cash reserves. Maybe I wouldn’t do this if our landlord started accepting Bitcoin, but he doesn’t even allow for wire or credit card payments (just good ‘ole fashioned checks), so I don’t see that happening anytime soon.

That’s all for today. Happy Bitcoining.

Gary J. Ross is a partner at Ross & Shulga PLLC, which he co-founded in 2017 after running his own firm for four years and after several years in Biglaw and the federal government. Gary handles corporate and securities law matters for venture capital funds, startups, and other large and small businesses, as well as investors in each. You can reach Gary by email at Gary@RSglobal.law.

Topics

, , , , ,