The Washington Department of Revenue (DOR) has issued a statement regarding the taxability of bitcoin-related activities. If a seller accepts bitcoin as payment for goods or services, the bitcoin is treated as consideration for the purchase. If a seller immediately converts bitcoin received from a buyer to U.S. dollars, tax is computed on the converted amount. Sellers are required to maintain documentation, including the following:
If a seller does not immediately convert the bitcoin received from the buyer to U.S. dollars, the measure of the tax is the value of the bitcoin, expressed in U.S. dollars, as of the date of sale. The value can be determined using a reliable cryptocurrency pricing index. Retail sales tax and Business & Occupation (B&O) tax is computed on this value. Sellers are required to maintain documentation, including the following:
The DOR does not accept bitcoin as payment for taxes. Taxpayers must convert bitcoin to U.S. dollars prior to remitting payment to the DOR.
The DOR also provides guidance on bitcoin mining. Bitcoin mining is the process of digitally adding transaction records to bitcoin’s public ledger of historical transactions. Miners receive bitcoin for engaging in this activity in the form of transaction fees and block rewards. The transaction fees and block rewards are gross income from activities subject to the service and other activities B&O tax classification since they do not fall under another specific B&O tax classification. The measure of the tax is the value of the bitcoin at the time it is obtained by the miner. Miners are required to maintain documentation, including the following:
The DOR also provides guidance regarding the taxability of bitcoin purchased and sold as an instrument of investment. Generally, individuals (non-business) who buy and sell bitcoin as an instrument of investment are not subject to Washington taxes on their gains.
However, income from interest, commissions, trading, dividends, and other sources realized from bitcoin investments by stockbrokers and security houses are reportable as “gross income of the business.” The income is generally subject to B&O tax under the service and other activities classification. Stockbrokers and security houses cannot take a deduction for income derived from investments.
Additionally, banking and lending businesses cannot take a deduction for income derived from investments. Income from gains on bitcoin investments are reportable as “gross income of the business.” The income is generally subject to B&O tax under the service and other activities classification.
The DOR notes that the information provided may be relevant for addressing other cryptocurrency business activities, depending on the facts in each case. However, businesses should be aware that the Department will review other cryptocurrencies based on the facts applicable to those cryptocurrencies. (Interim Statement Regarding Bitcoin: Payments, Mining, and Investment Income, Washington Department of Revenue, August 20, 2019)