Bitcoin Taxation

Bitcoin Taxation

Dear Client:

Are you considering accepting bitcoins as payment? If so, you should know the tax implications of accepting bitcoins in your business and the major pros and cons of doing so. I’m going to use an example to explain this.

Example. Carol is a freelance consultant. In exchange for her $1,500 invoice to a client, she receives 1.5 bitcoins. The bitcoin exchange rate at that time is $1,000 per bitcoin. Her payment processor charges 0.8 percent, up to a maximum of $8 per bitcoin transaction.

Two years later, Carol buys a $1,000 computer using 0.5 bitcoins. The exchange rate at the time is $2,000 per bitcoin.

Initial receipt. Carol receives property worth $1,500 in exchange for her services. The $1,500 value of the bitcoins is ordinary income to Carol (and subject to self-employment tax, since she received it in her trade or business).

Carol’s adjusted basis in the bitcoins received is the fair market value of $1,500 plus the $8 transaction fee, or $1,508. Because bitcoins are a capital asset (property), the transaction fee is added to its capital basis.

Computer purchase. Carol exchanged 0.5 bitcoins for the computer. Carol’s gain or loss on the transaction is the fair market value of the property received less her adjusted basis in the bitcoins.

Carol received a computer valued at $1,000 and gave up bitcoins with an adjusted basis of $503 (one-third of $1,508). Carol has a taxable gain of $497 and an adjusted basis of $1,005 in her remaining bitcoins.

The $497 gain is a tax-favored, long-term capital gain to Carol because she held the bitcoin property for more than a year.

Pros and Cons

Pro: Capital losses deductible. If you recognize a loss on a bitcoin transaction, then it is deductible from your other income, subject to the limitations applicable to capital losses. And if you are a noncorporate taxpayer, then you can carry forward any losses that you can’t use in the current year.

Pro: Taxable capital gains. Your bitcoins can appreciate in value, causing you to both gain extra income and pay taxes on that income. If you recognize a gain on a bitcoin transaction, then you have a short- or long-term capital gain on which you have to pay taxes. You may also have to pay the 3.8 percent net investment income tax on this gain. In cash transactions, you don’t have the possibility for profit or the complications of paying taxes.

Pro: Lower transaction fees. Stripe, a large third-party payment processor, processes bitcoin transactions for 0.8 percent of the gross amount, up to a maximum of $8 per transaction, compared with 2.9 percent plus $0.30 for credit card transactions (with no maximum).

If you receive a $2,000 payment for services rendered, your potential transaction costs are

  • $8.00 for a bitcoin transaction, and
  • $53.80 for a credit card payment.

Con: Basis tracking. Cash is cash and requires no special tracking. With bitcoin, you need to track the adjusted basis in your bitcoins and account for basis changes due to fractional sales.

Con: Liquidity. Once you get bitcoins, you may find it difficult to find others to transact with to use your bitcoins for goods and/or services.

You now have the big picture of how transacting business with bitcoins works. If you want to discuss virtual currency with me, please don’t hesitate to contact me.


Paycheck Protection Program loan forgiveness

Paycheck Protection Program loan forgiveness

Learn how you can prepare for Paycheck Protection Program (PPP) loan forgiveness.

If you’re a recipient of a PPP loan, you may apply for forgiveness 8 weeks after your lender sent you the PPP funds. All or part of your loan may be forgiven, if you meet certain requirements.

The use of the PPP loan proceeds listed below pertain to the forgivable amount of a PPP loan, and are not the only allowable uses of a PPP loan.

Regulations and guidance from the SBA and the U.S. Department of the Treasury on the PPP are evolving rapidly and the below information may be outdated. Please refer to the latest guidance from SBA and Treasury to confirm current program rules.

Note: If you are inquiring about new applications for the Paycheck Protection Program, we are not accepting new applications at this time. If you have already applied for a PPP loan within QuickBooks Capital, your application is currently pending and no additional information is needed at this time. We’ll notify you via email when we have an update.
Note: The amount of the loan forgiveness can be up to the loan principal amount plus accrued interest.
· Principal: the sum of the PPP loan money you received.
· Accrued interest: the interest on the PPP loan.

Here are some things you should consider:

What’s the best way to use my PPP funds if I want to maximize my potential loan forgiveness?

Use the PPP loan funds within an 8-week period after your lender sent you the funds. You don’t have to use all of your loan proceeds in the first 8 weeks. However, amounts you spend after this 8-week period won’t be forgivable.

Use 75% or more funds on eligible payroll costs.

Eligible payroll costs include compensation for employees whose principal residence is the U.S., including:

  • Salary, wages, commissions, or similar compensation
  • Additional wages paid to tipped employees, if applicable
  • Employee benefits, such as PTO, allowance for employee separation of dismissal, insurance premiums, taxes, and retirement

To the extent an employee earns in excess of $100,000, you may only include a maximum payroll amount of $15,385 per employee in your forgiveness amount determination.

If you’re a Form 1040 Schedule C filer:

Effective April 20, 2020, the SBA adopted a different rule applicable to those that filed or will file a 2019 Form 1040 Schedule C. Under the new rule, for example, owner compensation replacement, for purposes of determining loan forgiveness, is limited to 8-weeks’ worth of 2019 net profit amount, capped at $15,385.

However, it is not yet clear whether Schedule C filers that applied or had their application submitted to the SBA before April 20, 2020 should apply for forgiveness under the old rule or new rule. The SBA is likely to issue additional guidance in the future.

Use up to 25% of funds on other eligible business costs:

  •  Business mortgage interest payments on mortgages in effect before February 15, 2020
  • Rent payments on leases dated before February 15, 2020
  • Utility payments for electricity, gas, water, transportation, telephone, or internet access under service agreements dated before February 15, 2020

If you’re a Form 1040 Schedule C filer:

Under the SBA’s April 20, 2020 rule, business mortgage interest payments, rent payments and utility payments for Schedule C filers must have been deductible on the 2019 Form 1040 Schedule C submitted with the loan application.

What else may impact your forgivable amount?

If you have employees, your loan forgiveness amount may be reduced as a result of reductions to employee headcount or wages.

Reducing the number of employees:

Your loan forgiveness amount may be reduced if the average number of full-time equivalent employees* you employ during the 8-week period after the lender sent your PPP loan funds to you is less than the average number of full-time equivalent employees per pay period between:

  • February 15, 2019 and June 30, 2019, or
  • January 1, 2020 and February 29, 2020

Most borrowers can choose which time period to use for comparison, but seasonal employers must use February 15, 2019 to June 30, 2019.

If any full-time employee reductions made between February 15, 2020 and April 26, 2020 are reversed by June 30th, 2020, your loan forgiveness amount will not be reduced.

Reducing employee salary or wages

Your loan forgiveness amount may be reduced if you reduce total salary or wages for any employee during the 8-week period after the lender sent your PPP loan funds to you more than 25% as compared to the most recent full quarter before the 8-week period.

If reductions made between February 15, 2020 and April 26, 2020 are reversed by June 30, 2020, your loan forgiveness amount will not be reduced.

This forgiveness reduction does not apply to reductions associated with employees who had a salary or wages higher than $100,000 in 2019.

Economic Injury Disaster Loan Advance

If you received an advance through the EIDL program, it will be deducted from your forgivable amount on a PPP loan.

How do I apply for forgiveness?

If you’re a PPP loan recipient, you will submit an application for forgiveness to your lender. Once you submit your application, your lender will determine your loan forgiveness eligibility.

Note: Once you submit your application for forgiveness, your lender will have 60 days to accept or deny your application.

To apply for loan forgiveness, you can submit an application to your lender including the following information for the 8-week period after the lender sent you the PPP funds:

  • Payroll tax filings
  • State income, payroll and unemployment insurance filings
  • Canceled checks, payment receipts, transcripts of accounts, or other documents verifying payments on mortgage obligations, payments on covered lease obligations, and utility payments
  • Documentation of any advance received under the CARES Act EIDL Emergency Grant program