Bitcoin and Taxes

Quick Take

Ohio’s attempt to accept allow tax payment via BitPay was launched to much acclaim in November 2018.
A year later, the program was paused for legal reasons and only 10 people had used it.
The Ohio Attorney General has held that the payment platform was a “financial transaction device” and as such should have followed statutory procurement procedures, as opposed to the grant of the contract to BitPay, placing the platform on permanent pause for now.

Like it or not, one of the basic challenges with the use of cryptocurrency for payments -- as opposed to speculation an investment -- is that businesses have to accept it. If it's not easy for businesses and consumers to use, they won't. It's simple.

So it was big news among crypto fans when last year, in November 2018, that Ohio announced the launch of a website that would allow state taxes to be paid using cryptocurrency, viral rocket emojis included.

Ohio wasn’t actually accepting crypto, mind you -- it had signed up with BitPay, which acts as an intermediary and converts your customers bitcoin into cash for you and then ACH's dirty fiat to your statist bank account.

Anyway, seems like the experiment met with a yawn by Ohio taxpayers, only 10 of whom used the site. And there were also legal issues, apparently. Dirty statist legal issues. On October 2, 2019, Ohio's Treasurer suspended the Ohio website and "asked the Ohio Attorney General for a formal opinion on whether the payment method facilitated by the program’s third-party processor constitutes a 'financial transaction device” under Ohio law.'" If it is a third-party processor, then the company providing the service (BitPay) should have been selected through a competitive bidding process (it wasn't apparently).

The State Attorney General issued an opinion about a month ago concluding that, indeed, the payment processing website was a financial transaction device and should have gone through a statutory approval process.

The A.G.'s opinion relies on 2014 I.R.S. guidance to define cryptocurrency or virtual currency as "a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like 'real' currency . . . but it does not have legal tender status in any jurisdiction." (citing IRS Notice 2014-21, (I.R.S. March 25, 2014)). Further,

"Taxpayers that wished to pay their taxes in cryptocurrency using OhioCrypto.com would not pay the Treasurer directly with cryptocurrency. At no point would the State Treasury actually hold cryptocurrency. Instead, the former Treasurer [*3] contracted with a third-party company, BitPay, Inc., to process the payments. The taxpayer paid BitPay in cryptocurrency. BitPay settled the payment, converted the payment to U.S. Dollars, and then paid the Treasurer in U.S. Dollars. BitPay guaranteed the payment against fluctuation of the value of the cryptocurrency while the payment was being processed. And BitPay charged a fee for its service. The fee was charged directly to the taxpayer when the taxpayer used OhioCrypto.com, and was added to the total amount the taxpayer paid through OhioCrypto.com. The payment was ultimately settled using an automated clearing house process between BitPay and a bank account maintained by the Treasurer."

Ohio law allows state expenses to be paid by a "financial transaction device." That term is defined to include ""credit card, debit card, charge card, prepaid or stored value card, or automated clearinghouse network credit, debit, or e-check entry that includes, but is not limited to, accounts receivable and internet-initiated, point of purchase, and telephone-initiated applications, or any other device or method for making an electronic payment or transfer of funds."" The A.G. concluded that the bitcoin payment website that used bitpay as a processor constituted a "device or method for making an electronic payment or transfer of funds." Bottom line -- as a result, the state has to go through a statutory procurement process to select a payment processor.

Now, if Ohio had its own wallet address and didn't use an intermediary, I suppose they ... wouldn't have to go through this procurement process. But I gotta say, the notion of a state accepting bitcoin directly at this historical moment -- it seems like a reach. You have to be able buy tires and tacos first. One also wonders what the point of doing this is if only 10 people used the website to pay taxes in 10 months. I mean, other than innovation theater, will Ohio find it worth the time, effort and money to go through a procurement process for a platform for which so little interest was shown? Time will tell, but color me skeptical that this will get great take up in the near term.