The New York and California Way: How Countries in the U.S. Are Taxing Bitcoin

Despite research showing that millions of Americans hold cryptocurrencies, only a few states have actually enacted tax laws or issued concrete guidance on how to deal with the relatively new phenomenon, Bloomberg Tax reported on September 12.

Bitcoin Tax Laws Virtually Nonexistent

Can cryptocurrencies be regarded as cash? Can they be subjected to the same taxing laws? Can they be taxed at all? These are just some of the questions many U.S. states are looking to answer in their bid to introduce more regulation into the booming industry.

According to a September 12 report from Bloomberg Tax, 24 states, including the District of Columbia, have already introduced bills that deal with Bitcoin.

However, very few of those states have actually addressed the problem of how to tax and regulate Bitcoin and Bitcoin payments.

New York and California are the two states that have done the most in the emerging area with respect to taxation. Both countries have written guidelines on calculating sales tax when using Bitcoin for purchases.

The New York Method

According to Bloomberg Tax, the state of New York focuses on the value of the Bitcoin transferred to determine the sales tax base, not the list price of the good.

Christopher Beaudro, an associate at Eversheds Sutherland US LLP, told Bloomberg Tax that the seller must evaluate the value of Bitcoin at the time of the transaction when collecting sales tax under the New York model.

If a consumer purchased a taxable item listed at $50, with an amount of Bitcoin evaluated at $49.57, the sales tax would likely be calculated on from the $49.57, the report explained.

Gregory Turner, the founder of Turner Law, explained that the state of New York seems to be treating Bitcoin-like currency, despite it being classified as property under IRS guidelines.

Turner added that this method is significantly more difficult to utilize and might be a problem for many of the smaller countries lacking the necessary administrative infrastructure. Due to the fluctuating value of Bitcoin, sellers may need to constantly reevaluate the value of the Bitcoin, making the process harder, Beaudro said.

However, Turner told Bloomberg Tax that this despite its shortcomings, the New York method could be considered to more closely tax the economic value transferred by the purchaser.

The California Method

California decided to take a completely different route from New York when it came to taxing bitcoin.

California’s model calculates sales tax using the list price of a good, not the value on the Bitcoin, Beaudro said. If the consumer purchases a taxable good for $50, then the seller would be obligated to collect sales tax based on the $50 list price, the report explained.

Turner called this more of a “ballpark” method, adding that it’s more consistent with the IRS’s approach for federal tax purposes because it treats Bitcoin more like property.

Beaudro commented on the California method, too, saying that it appears more straightforward to administer than New York’s because the fluctuating value of the Bitcoin likely wouldn’t affect the sales tax base.