A. Bitcoin uses public-key cryptography, peer-to-peer networking, and proof-of-work to process and verify payments. Bitcoins are sent (or signed over) from one address to another with each user potentially having many, many addresses. Each payment transaction is broadcast to the network and included in the blockchain so that the included bitcoins cannot be spent twice. After an hour or two, each transaction is locked in time by the massive amount of processing power that continues to extend the blockchain. Using these techniques, Bitcoin provides a fast and extremely reliable payment network that anyone can use.
The supposed sanction of regulation has also tempted the conventional financial industry to make it easier for customers to access bitcoin. This concerns asset managers and payment service providers as well as insurers and banks. The entry of financial institutions suggests to small investors that investments in Bitcoin are sound.
In this guidance, we address the taxability of bitcoin related activities. Information in this guidance may be relevant for addressing other cryptocurrency business activities, depending on the facts in each case. However, please note that other forms of cryptocurrency may have different features that may lead to different tax results, and thus businesses should be aware that the Department will review other cryptocurrencies based on the facts applicable to those cryptocurrencies.
Taxpayers are responsible for retaining appropriate documentation pursuant to WAC 458-20-254 and RCW 82.32.070. Guidance on appropriate documentation for transactions involving bitcoin is discussed below.
The examples below solely address situations where bitcoin is tendered in an amount equal to the amount invoiced for goods or services and the related retail sales tax. This guidance does not address situations where sellers accept payment in bitcoin that is greater or less than the amount invoiced for goods or services and the related retail sales tax. In these latter situations, taxpayers are encouraged to contact the Department for additional guidance.
In cases where a seller immediately converts bitcoin received from a buyer to US dollars, tax is computed on the converted amount. Sellers must retain documentation indicating the time of sale, the value of the converted amount (sale), and documentation of the transaction. Suitable documentation may include:
In cases where a seller does not immediately convert bitcoin received from a buyer to US dollars, the measure of the tax is value of bitcoin, expressed in US dollars, as of the date of sale. This value may be determined via a reliable cryptocurrency pricing index.3 Retail sales tax and retailing B&O tax is computed on this value. Sellers must retain documentation indicating the time of sale, the value of the bitcoin amount (sale), and documentation of the transaction. Suitable documentation may include:
The measure of the tax is determined by the value of the bitcoin at the time it is obtained by the miner; this is the case for transaction fees and block rewards. Miners are required to retain documentation of this value in accordance with WAC 458-20-254 and RCW 82.32.070. Bitcoin miners must retain documentation indicating the date bitcoin is received and the value of the related gross income. Suitable documentation may include:
A B&O tax deduction is provided for amounts derived from investments (RCW 82.04.4281). Generally, individuals (i.e. non-business) who buy and sell bitcoin as an instrument of investment are not subject to Washington taxes on their gains. 781b155fdc