Tax authorities all over the world are making decisions on how to view the new and increasingly popular decentralized digital currencies such as Bitcoin.

In New York, the state's Department of Taxation and Finance issued a Dec. 5 technical memorandum declaring that purchasing bitcoins will not be subject to sales tax. However, when using the bitcoins to purchase goods or services that are subject to sales tax, the buyer must pay sales tax to the seller based on the market value of bitcoin at the time of transaction, the memorandum stated.

"The use of convertible virtual currency by a customer to pay for goods or services delivered in New York State is treated as a barter transaction," according to the memorandum. "For sales tax purposes, convertible virtual currency is intangible property. Since the purchase or use of intangible property is not subject to sales tax, any convertible virtual currency received by a party to a barter transaction is not subject to sales tax."

The ruling is in line with the U.S. Internal Revenue Service's March guidance on the taxation of Bitcoin. The IRS stated that Bitcoin and other digital currencies will be treated as property, not currency, for federal tax purposes, subject to capital gain and loss rules.

New York has been active in terms of Bitcoin regulation, with the Department of Financial Services, led by Benjamin Lawsky, in the process of developing a BitLicense for businesses operating in Bitcoin.

The digital currency industry is closely watching the regulatory environment, with many worried about how governments will view cryptocurrency for tax purposes.

In Europe, countries are split on how to view digital currency. Germany and the U.K. view cryptocurrency as a type of commodity, which is not liable for a value-added tax (VAT) on every transaction. Poland and Estonia have instead ruled that VAT is applicable on cryptocurrency transactions.

If the VAT applied in the U.K., "being liable for VAT puts a 20% tax on each bitcoin purchase," said Richard Asquith, vice president of global tax compliance at Avalara, a tax management provider that in May developed a Bitcoin module for its product.

Finland recently came out with a controversial ruling on digital currency, stating that it is indeed a payment instrument (or a currency). Many regulators and bankers have said Bitcoin is not a currency because there is no issuer.

The rules in the 28 member countries of the European Union will soon be congruent, as the issue has been brought to the European Courts.

While the courts usually take anywhere between six months and two years to decide, Asquith expects the decision will come by the spring or summer of 2015.

"Because the exchange rate has stabilized now, people and merchants are becoming more willing to accept it…and that makes it more of an important issue in the EU," Asquith said. "If they don't have a fiscal position ironed out then they're potentially missing tax revenue. And all tax authorities are desperate." 

Subscribe Now

Authoritative analysis and perspective for every segment of the payments industry

14-Day Free Trial

Authoritative analysis and perspective for every segment of the industry