How are business crypto payments taxed and reported?
If your business accepts crypto payments for goods and services, you may be wondering if you have different tax reporting and payment obligations than if you accept payments in fiat currency, such as the U.S. dollar. The short answer is: yes.
Whether your business receives cash or crypto as payment for goods and services the income is taxable, generally as ordinary income. For tax purposes, crypto is considered property, so the income is measured by the fair market value of the crypto at the time of receipt.
If a business receives and holds crypto and then uses that crypto to pay business expenses, the payment is treated as a taxable event (as if the business had sold the crypto for cash and then used the cash to pay the expenses). That taxable event generally creates gain or loss, potentially subject to tax at long-term capital gains rates if held for more than one year and short-term capital gains rates if held for one year or less.
In summary, a business that receives crypto and uses it to pay expenses or otherwise converts it into cash is generally subject to tax at ordinary income tax rates when the crypto is received and at capital gains tax rates when the crypto is converted. It may be beneficial for a business that receives crypto payments to convert the crypto to cash right away to avoid potential fluctuations in value. If the business holds onto the crypto and later converts it to cash or uses it to pay expenses after the value has changed, there may be the potential for losses or for tax at capital gains rates on appreciation.
One advantage in working with a third party, like Bakkt, is that your transactions are settled in fiat currency. This means that when you use Bakkt to pay an employee in crypto or accept payments in crypto, Bakkt maintains custody of the crypto until the transaction is settled. As a result, your business can effectively transact in fiat currency as you normally would.
Your business is required to report revenue received in crypto in the same way as fiat currency. For many small businesses organized as sole proprietorships, this is reported on Schedule C on IRS Form 1040. Similarly, if your business paid more than $600 in crypto to a non-employee or wages to an employee, you must report those payments in the same way as fiat currency1, generally on IRS Form 1099 for a non-employee and an IRS Form W-2 for an employee. However, if your business realizes a gain or loss from holding and transacting in crypto, then those transactions must be reported on IRS Form 8949, which is why it's vital to have accurate records of all crypto transactions.
It's also important to stay up to date on the current regulatory environment around crypto, as rules around crypto and crypto taxes can quickly change. Make sure to consult a tax professional before you delve into crypto payments to ensure it makes sense for your business.