The New Jersey Division of Taxation recently issued a revised Technical Bulletin, TAM-2015-1(R), addressing the New Jersey tax treatment of transactions involving convertible virtual currency, such as Bitcoin.
The new Bulletin, issued March 21, updates the original Bulletin, issued in 2015, to adhere to recent federal guidance addressing the federal tax treatment of convertible virtual currency as detailed in IRS Notice 2014-21, Rev. Rul. 2019-24, and IRS Chief Counsel Memorandum 202114020.
Convertible Virtual Currency
The Bulletin specifically addresses “convertible virtual currency,” which is defined as having an equivalent value in real currency or acting as a substitute for real and legally recognized currency. The Bulletin says this currency can be used “as a medium of exchange or as a form of digitally stored value”: “Taxpayers may use it to pay for goods or services, or hold it for investment purposes.”
Corporation Business Tax
For New Jersey corporation business tax purposes, New Jersey conforms to the federal tax treatment of convertible virtual currency. The guidance specifically states the following:
Because transactions using virtual currency must be reported in U.S. dollars for federal tax purposes, taxpayers are required to determine the fair market value of the convertible virtual currency in U.S. dollars as of the date of payment or receipt.
Since virtual currency is intangible property rather than tangible personal property, the nexus safe harbor protections afforded by the Federal Interstate Income Act (Public Law 86-272) do not apply to a company that sells virtual currency to customers in New Jersey. Therefore, an out-of-state company that sells virtual currency to customers in this State is considered to be doing business in this State for Corporation Business Tax purposes.
Gross Income Tax
The guidance similarly states that for New Jersey gross income tax purposes, the state conforms to the federal tax treatment of the gain or loss from the sale or exchange of property. With respect to the payment of compensation using convertible virtual currency, the guidance provides:
[T]he fair market value of convertible virtual currency paid as wages is subject to New Jersey Gross Income Tax withholding. An independent contractor that receives convertible virtual currency for services performed must determine the fair market value of the currency in U.S. dollars as of the date received. A payment made using convertible virtual currency is subject to information reporting requirements to the same extent as any other payment made in property.
Sales and Use Tax
For New Jersey sales and use tax purposes, the Guidance explains that convertible virtual currency is treated as intangible property. Accordingly, its purchase for investment purposes is not subject to sales tax. However, the Guidance explains:
[W]hen a person uses convertible virtual currency as payment for taxable goods or services, New Jersey Sales or Use Tax applies. Any seller and/or retailer of taxable goods or services that accepts convertible virtual currency as payment must determine the fair market value of the currency in U.S. dollars as of the date of payment and charge the purchaser Sales Tax on the underlying transaction.
Per the bulletin, sellers that accept convertible virtual currency as payment for property or services must:
- record the value of the convertible virtual currency accepted at the time of each transaction, converted to U.S. dollars;
- record 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 periodic returns.
What does CohnReznick think?
Cryptocurrency and virtual currency transactions represent an innovative and evolving technology. The use, regulation, and taxation of virtual currency, and the related topic of non-fungible tokens, or NFTs, for example, are still in their infancy. Accordingly, taxpayers using virtual currency should ensure they understand and comply with all applicable federal and state rules. As the use of virtual currencies becomes more commonplace, opportunities and hazards will surely follow. Taxpayers and their advisors need to remain vigilant.
Subject matter expertise
JD, Principal, Practice Leader, State and Local Tax (SALT) Services
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