By Owen Giordano
In just over a decade, cryptocurrency has radically altered our society’s notion of currency.[1] With a growing number of United States (US) citizens holding onto cryptocurrency, many states are at an impasse as to how they should collect tax on the transactions made with the medium.[2] However, under Virginia’s sales tax statute, the state is allowed to levy a tax on transactions.[3] The scope of this tax is broad and allows taxation on transactions done with currency or through bartering (i.e., property for property).[4] As such, retail sales transactions involving cryptocurrency are likely taxable in the state of Virginia, and that retailer would be obligated to collect the tax on Virginia’s behalf.[5] This development would lead to multiple issues for retailers in Virginia.
Foundational knowledge of this topic is necessary before discussion. To start, cryptocurrency refers broadly to a decentralized, digital currency.[6] This medium lacks any sort of centralized oversight that traditional currencies have, with cryptocurrency transactions recorded on a digital register known as a blockchain.[7] A blockchain is best described as a “ledger” that records and tracks the transactions of all assets (tangible and intangible) done with a specific cryptocurrency. Further, a cash equivalent refers to any form of investment security that can be readily liquidated (turned into cash), such as checks.[9] Put bluntly, a cash equivalent is any medium that works like cash in a transactional setting. Finally, and importantly, this blog assumes that, because cryptocurrency is a medium that can be readily liquidated and is ultimately designed as a substitute for cash, Virginia designates cryptocurrency as a cash equivalent.[10]
Through both the relevant sales tax statute and the choice to label cryptocurrency as a cash equivalent, transactions conducted with cryptocurrency would assuredly be taxable, and retailers would be obligated to collect the associated sales tax.[11] While this creates various possibilities, the decision is not without issues.
To begin, cryptocurrency on paper seems more portable than tangible currency due to the medium’s digital (and thus intangible) nature.[12] The closest analogy would be making a purchase via check or card payment for an expensive transaction, in that those mediums save consumers from the hassle of carrying thousands and thousands of coins or dollars. However, the ability to “carry” cryptocurrency has higher barriers to access than carrying cryptocurrency. As a digital currency, the use of cryptocurrency requires some sort of digital device with internet access to engage in a transaction.[13] Conversely, access to such devices and services is not needed for all-cash transactions because of cash’s tangible nature. While over ninety percent of US adults have access to the internet, adding such hurdles makes cryptocurrency a less efficient medium than tangible currencies.[14] One could argue that this issue applies to check or card payments as well. Yes, but the tangible nature of check payments does not require the additional requirements of constant access to digital devices or the internet. Simply put, the current business infrastructure in Virginia (and the country at large) remains lacking for transactions involving cryptocurrency. Therefore, to fully benefit from the use of cryptocurrency, investment in blockchain technology, as well as the ability to access said platforms more readily and freely, is needed.
Secondly, there is the question of cryptocurrency’s acceptability as a form of payment. Cryptocurrency is notable for its oscillating value.[15] This is partly due to the medium’s decentralized, where there is no regulatory body helping to stabilize the medium.[16] The unstable value contributes to businesses’ apprehension towards accepting cryptocurrency, as a profit could turn into a loss within the span of a day.[17] In the realm of sales tax collection obligations, the oscillating values raise concerns as to when the tax should be collected and what a retailer should do about their tax collection obligation when there is swift and dramatic change in the value of a cryptocurrency.[18] As such, Virginia would need to develop policy to address this key issue.
To conclude, cryptocurrency offers potential as a cash equivalent. Its promise of decentralization and minimal regulatory interference offers many valid reasons for its adoption and use in transactions. However, due to the medium’s novel nature, there is still much planning and development needed to support its use. As such, should cryptocurrency qualify as a cash equivalent, investment in the appropriate technological infrastructure would be necessary for Virginia to reap the benefits this medium offers.
[1] “Cryptocurrency” is used this blog post to the broad concept of cryptocurrency, rather than a particular type of cryptocurrency.
[2] Eswar S. Prasad, Are Cryptocurrencies the Future of Money?, EconoFact (Oct. 19, 2021), https://econofact.org/are-cryptocurrencies-the-future-of-money#:~:text=Cryptocurrencies%20have%20captured%20the%20public,end%20from%20a%20societal%20perspective; Cryptocurrency Sales and Use Tax by State, The Bureau of National Affairs, Inc. https://pro.bloombergtax.com/brief/cryptocurrency-tax-laws-by-state/ (last updated: Nov. 22, 2021).
[3] For the purposes of this paper, a “transaction” concerns the retail sale of a taxable good or service. Other types of transactions, such as exchanges for cash equivalents or non-tangible goods, exist, with different states adopting different views on the taxability of such transactions. See Casey W. Baker et al., U.S. State Taxation of Cryptocurrency-Involved Transactions: Trends & Considerations for Policy Makers, 75 Tax Law. 601, 625-26 (2022); Va. Code §§ 58.1-603 (authorizing sales tax)
[4] Va. Code §§ 58.1-602, 58.1-603 (definitions, authorization of a sales tax for both transactions using currency or property).
[5] Va. Code § 58.1-612.
[6] Kate Ashford, What Is Cryptocurrency?, Forbes, https://www.forbes.com/advisor/investing/cryptocurrency/what-is-cryptocurrency/ (Jun. 6, 2022).
[7] Id.
[8] What is Blockchain Technology?, International Business Management, https://www.ibm.com/topics/what-is-blockchain#:~:text=Blockchain%20for%20Dummies%22-,Blockchain%20overview,patents%2C%20copyrights%2C%20branding (last visited: Aug. 18, 2022).
[9] James Chen et al., Cash Equivalents¸ Dotdash Meredith, https://www.investopedia.com/terms/c/cashequivalents.asp#:~:text=Cash%20equivalents%20are%20the%20total,are%20the%20most%20liquid%20assets (last updated: Nov. 27, 2020).
[10] See Eswar S. Prasad, Are Cryptocurrencies the Future of Money?, EconoFact (Oct. 19, 2021), https://econofact.org/are-cryptocurrencies-the-future-of-money#:~:text=Cryptocurrencies%20have%20captured%20the%20public,end%20from%20a%20societal%20perspective (contemplating the effects of using cryptocurrency in a transaction setting, in a manner similar to most cash equivalents); Paulina Likos & Coryanne Hicks, The History of Bitcoin, the First Cryptocurrency, U.S. News & Report, L.P. (Feb. 4, 2022), https://money.usnews.com/investing/articles/the-history-of-bitcoin (mentioning Bitcoin’s, a cryptocurrency, use in transactional settings in a manner similar to cash equivalents); Nathaniel Popper, Bitcoin Has Lost Steam. But Criminals Still Love It, N.Y. Times (Jan. 28, 2020), https://www.nytimes.com/2020/01/28/technology/bitcoin-black-market.html (criminals using cryptocurrencies in transactional settings, further comparison of the medium to cash equivalents).
[11] Va. Code §§ 58.1-602, 58.1-603, 58.1-612.
[12] Kate Ashford, What Is Cryptocurrency?, Forbes, https://www.forbes.com/advisor/investing/cryptocurrency/what-is-cryptocurrency/ (Jun. 6, 2022).
[13] The Basics about Cryptocurrency, State University of New York at Oswego, https://www.oswego.edu/cts/basics-about-cryptocurrency (last visited: Aug. 28, 2022).
[14] https://www.pewresearch.org/internet/fact-sheet/internet-broadband/
[15] Eswar S. Prasad, Are Cryptocurrencies the Future of Money?, EconoFact (Oct. 19, 2021), https://econofact.org/are-cryptocurrencies-the-future-of-money#:~:text=Cryptocurrencies%20have%20captured%20the%20public,end%20from%20a%20societal%20perspective
[16] Id.
[17] Ryan Haar, You Can Buy More Things Than Ever With Crypto. Here’s Why You Shouldn’t, NextAdvisor, LLC, (May 3, 2022) https://time.com/nextadvisor/investing/cryptocurrency/should-you-use-crypto-like-cash/ (citing only 20% of people will use cryptocurrency as a cash substitute).
[18] Va. Code § 58.1-612.
Image source: https://time.com/nextadvisor/investing/cryptocurrency/should-you-use-crypto-like-cash/