Paying taxes in bitcoin looks more and more attractive

Bitcoin and other cryptocurrency prices have gone down again. These are not the intoxicating $20,000 times, at least not now. If you are holding bitcoin or other crypto, you may well not want to sell until the market recoveries. But if you owe taxes, how about paying them in bitcoin (or selling the bitcoin to pay your tax in dollars)?

Selling now may trigger tax losses to use next year too. And in at least one state, paying tax in bitcoin is a reality. In Ohio, you can now make state tax payments in bitcoin. It's only for bitcoin at present, but the permitted crypto should expand according to OhioCrypto.com.

Ohio beat out Arizona, Georgia, Utah and New Hampshire, where efforts to accept crypto for taxes failed. The transaction fee is zero during an initial three-month introductory period, and then 1 percent thereafter. Even if you owe taxes to Ohio, that does not necessarily mean you qualify.

So far, this is just for businesses operating in Ohio. If you operate a business in Ohio and have a tax bill, you can register at OhioCrypto.com. All payments are processed by third-party processor, BitPay. Payments are converted to dollars before deposit into a state account.

Payment Protocol-compatible wallets include BitPay Wallet; Copay Wallet; BTC.com Wallet; Mycelium Wallet; Edge Wallet; Electrum Wallet; Bitcoin Core Wallet; Bitcoin.com Wallet; BRD Wallet; and Bitcoin Cash (BCH) Wallets. If you don't have one, OhioCrypto.com says you can create one.

Of course, it's important to remember the only big missive the IRS have given about crypto. Way back in 2014, the IRS ruled that cryptocurrency is property in Notice 2014-21. That classification as property has some big tax consequences, accentuated by wild price swings.

If you owe $5,000 in taxes, you could pay the $5,000 in dollars. If you pay with $5,000 worth of bitcoin, as long as the crypto is worth $5,000 when you pay, you're home free, right? Not really. You need to consider the sale you just made.

The transfer of the crypto to the tax man is a sale, and that could mean more taxes for the year of the payment. If you bought the crypto for $5,000 the day you pay your taxes, there's no gain. But suppose you bought the crypto a year ago for $1,000 and it's worth $5,000 when you use it to pay taxes? That's right, you have a $4,000 gain.

Hopefully, it is a long-term capital gain, which would make the taxes lower, at least for federal tax purposes. Remember, California taxes ordinary income and capital gain at the same high tax rates. So even capital gain does not save you tax money in California, except for being able to apply your basis. That is, when you sell a capital asset, you should not have to pay tax on your basis.

If you actually tax in crypto, or sell crypto to pay tax in dollars, you still have taxes to pay -- because of your tax payment. You could trigger a tax loss too, if you had bought the crypto for $7,000 and transfer it for taxes when it is worth $5,000. These days, a sale might well trigger a loss, which you may be able to use.

With crypto, of course, all sorts of transfers can trigger taxes. For example, payments using virtual currency made to independent contractors are taxable transactions to both parties. The recipient has income measured by the market value at the time of receipt. Then there are the reporting mechanics, which continue to be a big issue for many people.

If you are paying independent contractors with crypto, how do you report it? As with other payments to independent contractors, payers engaged in a business must issue IRS Forms 1099. You can't enter "1,000 Bitcoin" on IRS Forms 1099.

Instead, you must value the payment in dollars, as of the time of payment. In short, a payment made using virtual currency is subject to Form 1099 reporting just like any other payment made in property. What's more, the person paying the independent contractor with crypto just sold it. Whether that triggers a gain or loss depends on the payor's tax basis. The gain might be capital or ordinary. If you hold it for more than a year, the best deal is long-term capital gain treatment.

But actually, gain or loss depends on whether the virtual currency is a capital asset in your hands. Most people can probably say they are investors in crypto, not a dealer or someone using it in their trade or business. But it is worth considering. Ordinary income vs. long-term capital gain treatment can spell a big difference. You might have to pay only 15 percent (to the IRS) on long-term capital gain. But top long-term capital gain rates are 20 percent, plus the possibility of the 3.8 percent net investment income tax under Obamacare.

Remember, every time you transfer crypto, you might trigger gain or loss. Tax basis and holding period are important, as is record keeping. If you receive virtual currency as payment, you must you include its fair market value in income. Report the fair market value in U.S. dollars on the date you receive it. If you "mine" virtual currency, you have income from mining, and the fair market value of what you produced is income. Happy planning.