The Spring 2015 issue of the UK publication IFC Economic Report focuses on the balance between tax planning to the letter or to the spirit of the law and examines the ethical issues surrounding tax planning in the current legal environment. In that spirit, the publication asked six lawyers, academics and policy advocates from around the globe to revisit Judge Learned Hand's oft quoted statement that one may structure one's affairs to minimize taxes. They call this the "Big Debate." Here is my essay as contained in that issue.
#IFCEconomicReport #BigDebate #JudgeLearnedHand #TaxPlanningEthics
Saying that Bitcoins and other virtual currencies are more akin to property than to currency, the Department of Taxation determined that any use in New Jersey of Bitcoins to acquire any other property will be treated as barter and will subject both sides to sales tax. TAM-2015-1 (March 10, 2015). As property that changes in value a party holding and using Bitcoins may also have income tax liability arising from them.
Virtual currency is a form of digital money that can be used as a medium of exchange or as a form of digitally stored value. Taxpayers may use it to pay for goods or services, or hold it for investment. Virtual currency that has an equivalent value in real currency or that acts as a substitute for real currency is “convertible” virtual currency. The sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services, may have sales, use and income tax consequences as well as reporting requirements.
According to the IRS in Notice 2014-21, convertible virtual currency is treated as property for federal tax purposes. New Jersey conforms to the federal tax treatment of virtual currency.
Sales and Use Tax
New Jersey imposes tax on the receipts from retail sales and barter of certain tangible personal property and services. NJSA 54:32B-3(a) and 2(f). A barter transaction is comprised of two separate sale transactions. Each party to a barter transaction gives something of value to the other in order to receive something of value in return and sales or use tax is due from each party based on the value of the property or services given in trade if what is received in exchange is otherwise subject to sales tax.
According to the New Jersey Division of Taxation, since Bitcoins are property and not currency, when a customer uses Bitcoins to pay for property it is a barter of one type of property, the Bitcoins, for another type of property, and both seller and customer must pay sales tax.
Using an automobile as an example, if the seller of the automobile accepts Bitcoins as consideration, sales tax is due from the automobile seller based on the “amount allowed in exchange for” the Bitcoins, basically what the car would have sold for if sold for dollars. The seller must retain documentation of the amount for which they regularly sell the same or similar car to customers when the payment is in U.S. dollars and must record in their books and records the value of the Bitcoins accepted at the time of each transaction, converted to U.S. dollars, and the amount of sales tax collected at the time of each transaction, converted to U.S. dollars. Sellers must remit any sales and use tax due in U.S. dollars.
The customer that used the Bitcoins to acquire the car also owes sales tax based on the market value of the Bitcoins at the time of the transaction, converted to U.S. dollars, as if he had sold the Bitcoins outright. Since customers typically bear the sales tax on what they buy, it is likely that sellers, such as our automobile dealer, will require the Bitcoin using customer to pay both sides of the sales tax, unless special arrangements are made.
Corporation Business Tax and Gross Income Tax
New Jersey will follow the federal treatment of Bitcoins to the extent that the Corporation Business Tax Act and Gross Income Tax Act follow the federal tax treatment of gain or loss from the sale or exchange of property. Accordingly, a taxpayer will realize gain or loss on the sale or exchange (including the use in a barter transaction) of Bitcoins. The basis is the cost to acquire them and the gain or loss is based on the amount received when disposing of them. Using the automobile transaction as an example, in addition to the sales tax issue discussed above, if the Bitcoins used to acquire a $30,000 car originally cost the customer $20,000, he has a $10,000 gain from the transaction.
If Bitcoins are paid to an employee as wages or to an independent contractor for services, the fair market value of the Bitcoins must be measured in U.S. dollars on the date the employee or contractor receives it; in addition the employee is subject to New Jersey gross income tax withholding.
Finally, a payment made using Bitcoins is subject to information reporting requirements to the same extent as any other payment made in property.