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Member

Question about receiving Bitcoin as operating income for C corp

Hi, so I was wondering if someone could advise me on a hypothetical situation. 

 

  1. Say there's a U.S.-based company (C-corp) that receives $50k in Bitcoin (or gold or any other similar asset) as payment for goods/services.
  2. They don't have any expenses so that's 100% profit.
  3. The next day the assets drop to $0 and the company sells their amount at a 100% loss.
  4. Would the realization of those assets at a 100% loss offset the previous profit?
  5. Or would the company still owe $10,500 in taxes (0.21*$50k) and thus have to go bankrupt because their bank account is empty already? 

Your advice is greatly appreciated!

2 Comments
Catalyst V

Question about receiving Bitcoin as operating income for C corp

  1. Say there's a U.S.-based company (C-corp) that receives $50k in Bitcoin (or gold or any other similar asset) as payment for goods/services.
    That's called bartering, not selling
  2. They don't have any expenses so that's 100% profit.

    Unrealistic, as what you traded for whatever you received, has value and the business paid for it at some time or other. Even as a capital contribution, it still have value and cost to the business.
  3. The next day the assets drop to $0 and the company sells their amount at a 100% loss.
    You can't "sell" something at a 100% loss. You can only donate it, give it away, destroy it, or declare it a wash.
  4. Would the realization of those assets at a 100% loss offset the previous profit?
    No.
  5. Or would the company still owe $10,500 in taxes (0.21*$50k) and thus have to go bankrupt because their bank account is empty already? 
    Neither. Your hypothetical situation is just to unrealistic and would never happen in a million years. For starters, bitcoin is not recognized by the IRS as currency as of yet. It's considered an investment vehicle. So if you traded gold for bitcoin, that makes the gold your investment capital. Such a transaction would be reported on SCH D for the investment type it is. If you traded services (instead of product) for an investment, the services have no value. Your receipt of the gold or bitcoin for those services provided would not be a taxable event at the time the event occurred. Then if the value of what you received truly fell to zero before the end of the tax year, you have no loss, and therefore would not be paying taxes on it anyway. However, if there was a gain above it's value at the time you received it, that gain, and only the gain would be taxable.
    Remember, what you're talking here is investment transactions, not a business transaction.
Member

Question about receiving Bitcoin as operating income for C corp

Hey Carl, thanks so much for your response. Could I ask some more follow up questions if you don't mind? 

 

Let me try to paint a more realistic scenario to see if it still matches up. 

  1. An online company offers graphic design services and only accepts Bitcoin.
  2. Throughout the year, they receive $50k worth of Bitcoin.
  3. The price of their Bitcoins stays constant
  4. They pay let's say $20k of their Bitcoin to employees who do the design work (so $30k left).
  5. Near the end of the year the price of Bitcoin drops heavily so that remaining $30k is now worth $10k.
  6. They decide to convert that $10k in Bitcoin to USD in order to have some cash in their bank. 

My questions:

  • What are the taxable events here?
  • Is the receipt of those $50k in Bitcoin taxable as operating income? 
  • Is the $20k payment to employees taxed?
  • I assume the $20k loss from $30k original amount would be considered a capital loss?