The phenomenon that is cryptocurrency has been seen largely as an investment along with commodities such as gold, art, wine or classic cars. This is changing though as the digital currency can now be used to buy a multitude of products and services – and before long it could be a legitimate way of paying taxes.
Investment turned payment method
Cryptocurrencies such as Bitcoin have gained large coverage due to the spectacular (if erratic) gains and falls over the time since they became part of the public consciousness after Bitcoin appeared in 2009.
They’re traded in much the same way as traditional currencies are and – like existing physical currencies – could soon appear on tax paperwork as the method of payment for a tax bill.
Ohio: the cryptocurrency tax payment pioneer
The state of Ohio has become the first to accept cryptocurrencies as a way to pay taxes having set up a payment system facilitated by BitPay, the cryptocurrency payment platform.
Ohio’s decision to allow digital currency tax payment is part of a general policy to embrace the blockchain technology cryptocurrencies are based on; the Midwestern state hopes it may help attract larger corporations using this technology to invest and maybe base some of their operations there.
Implications of using cryptocurrency to pay tax
Initially Ohio will only accept Bitcoin, the largest by far of the many cryptocurrencies available.
For those considering using Bitcoin to pay all or part of their taxes in Ohio, it’s important to understand the tax implications in doing so.
Cryptocurrencies such as Bitcoin are assets such as gold, fine wines and property and as such attract capital gains tax if they’ve appreciated in value when sold.
Let’s assume you pay $1,000 towards your taxes with the equivalent value in Bitcoin; you’ve technically ‘sold’ that amount of Bitcoin so if you bought it for less than it’s now worth you’d have to pay tax on the difference – the gain.
The amount you’d pay is dependent on how long you’ve owned the Bitcoin; if over a year it’s classed as a long-term capital gain and taxed at a lower rate. If owned for a year or under at the time it’s ‘sold’ to pay the tax, any increase in value is treated as a short-term capital gain and thus would be part of your overall tax assessment.
On the other hand, if the value of your Bitcoin has dropped since purchase and you pay tax with it then some of that loss could be used to offset against any other capital gains in that tax year.
Other costs and requirements
Other than possible capital gains, the other costs include processing payments; after a free introductory period, these will be one percent of the transaction. You’d also be charged a network and miner fee.
You’d require a virtual wallet compatible with BitPay such as BitPay Wallet, Electrum Wallet or Bitcoin Core Wallet.
Will other states allow cryptocurrency tax payment?
The IRS (Internal Revenue Service) doesn’t presently accept cryptocurrency payments. So far some other states such as Utah, New Hampshire and Georgia have tried and failed while Arizona did initially approve cryptocurrency tax payment but it’s since been vetoed.
Other ways to spend cryptocurrency
A remarkably diverse range of services and products can be purchased with cryptocurrency ranging from fast food to cosmetic surgery and high ticket items such as luxury watches. Big brands such as Microsoft and Virgin willingly accept cryptocurrencies.
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