State and Local Tax (SALT) | | Feb 10, 2015
Summary. New York released bulletin TSB-M-14(5)c, (7)1,(17)S establishing guidelines for the treatment of convertible virtual currency (CVC) as it pertains to sales, corporation and personal income tax.
Background. With the IRS releasing guidance on virtual currency, many states have now gone on record with publications detailing the tax treatment of virtual currency.
New York is one of the latest states to release guidance on CVC following closely to the standards set by the IRS. Although virtual currency is not recognized as an official currency or legal tender, it is considered property and is treated as such for federal tax purposes. The New York publication goes on to state that “for corporation tax and personal income tax purposes, New York State Tax Law conforms to the federal treatment of convertible virtual currency as detailed in IRS Notice-2014-21.”
In matters of sales tax, the publication defines CVC as “intangible property.” It goes on to say that “since the purchase or use of intangible property is not subject to sales tax, any convertible virtual currency received by a party to a barter transaction is not subject to sales tax.” When a buyer uses CVC for the purpose of purchasing taxable services or tangible property, it will be treated as a barter transaction and will follow sales tax protocol as such. In a typical barter transaction, sales tax is due from both parties exchanging the taxable goods or services. In the case of virtual currency, the seller providing the taxable services or goods collects sales tax from the buyer for their services and remits the sales tax to the state. Although it is a barter transaction, the seller who receives CVC is not required to pay sales tax on the virtual currency since intangible property is not taxable. The buyer who receives the taxable goods or services pays the sales tax for the bartered transaction. In order to determine the tax liability, the publication states that the sales tax will be “based on the market value of the convertible virtual currency at the time of the transaction converted to U.S. dollars.”
Prager Metis’ Take. How states will handle the taxability of virtual currency will vary state by state. Although many states may follow the IRS guideline for federal tax purposes, sales tax is a different matter and will cause some confusion for companies with nexus in multiple states. A matter of contention for New York will be the lack of a clear and definitive conversion time for CVC in a transaction. The market value of CVC being volatile in nature makes this an even greater issue. Please contact a member of Prager Metis CPAs, LLC’s SALT and Advisory Practice including Chris Vignone or Eric Carrasco for further information.