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NY State tax agency clarifies sales-tax status for virtual-currency purchases

Be aware of exceptions to the rule for merchants as well as customers.

December 9, 2014

In a December 5 tax-guidance memorandum from the Taxpayer Guidance Division, the New York State Department of Taxation and Finance issued this statement with regard to virtual-currency purchases and sales tax:

"The use of convertible virtual currency by a customer to pay for goods or services delivered in New York State is treated as a barter transaction. For sales tax purposes, convertible virtual currency is intangible property. 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," the agency states in the memorandum.

However, the agency goes on to state: "If the party that gives convertible virtual currency in trade receives in exchange goods or services that are subject to sales tax, that party owes sales tax based on the market value of the convertible virtual currency at the time of the transaction, converted to U.S. dollars. If the party that trades property or services in exchange for receiving convertible virtual currency gives the other party a sales slip, invoice, or receipt, the first party must separately state the sales tax due in U.S. dollars on the sales slip, invoice, or receipt."

A seller making sales in New York State that accepts convertible virtual currency in exchange for taxable goods or services, the agency states, must:

• register for sales tax purposes;
• record in its books and records the value of the convertible virtual currency accepted at the time of each transaction, converted to U.S. dollars;
• record in its books and records the amount of sales tax collected at the time of each transaction, converted to U.S. dollars; and
• report such sales and remit any sales tax due in U.S. dollars when filing its periodic sales tax returns.

A trio of examples

The memorandum provides the following three examples for clarification [all examples verbatim from the agency memo]:

Example 1:An online retailer registered for New York State sales tax purposes accepts convertible virtual currency from a customer as payment for home décor items that will be delivered to the customer’s location in New York State. In effect, the customer has purchased the home décor items in exchange for the convertible virtual currency, and the retailer has purchased the convertible virtual currency in exchange for the home décor items.

Because home décor items are taxable, the customer owes sales tax based on the taxable receipt for the purchase of the items. The taxable receipt is the fair market value of the convertible virtual currency in U.S. dollars at the time of the transaction. However, because convertible virtual currency is intangible property, the retailer does not owe any sales tax on its exchange of home décor items for the convertible virtual currency. The retailer must record in its books and records the amount of the sale and the sales tax collected in U.S. dollars, and report the sale and remit the sales tax due in U.S. dollars when filing its periodic sales tax returns.

Example 2: A vendor in New York State that accepts convertible virtual currency as payment creates custom computer software for sale to a client. The custom software is delivered to a New York location. Since the sale of custom software is not subject to sales tax, this barter transaction is an exchange of a non-taxable product for non-taxable convertible virtual currency. No sales tax is due on this transaction.

Example 3:A New York State resident sends her watch to be repaired at a New York repair shop that accepts convertible virtual currency for its services. Since watch repair services are subject to sales tax, the resident owes sales tax based on the taxable receipt for the purchase of the service.  The taxable receipt for the repair service is the fair market value of the convertible virtual currency at the time of the sale. The repair shop must collect the sales tax and must separately state the tax from the fair market value of the convertible virtual currency on any sales slip, receipt, or invoice provided to the customer. The repair shop must also record in its books and records the amount of the sale and the sales tax collected in U.S. dollars, and report the sale and remit the sales tax due in U.S. dollars when filing its periodic sales tax returns.

Corporation tax and personal income tax

For corporation tax and personal income tax purposes, the agency reports, "New York State Tax Law conforms to the federal treatment of convertible virtual currency as detailed in IRS Notice-2014-21. The notice provides that convertible virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using convertible virtual currency."