By Rieva Lesonsky

There’s been a good deal of buzz about Bitcoin lately, and even some degree of controversy.  Bitcoin says it’s an “innovative payment network and a new form of money” that uses peer-to-peer technology. Is Bitcoin taxable? Germany just declared Bitcoin a private currency and will be taxing it soon. But here in the United States, there’s no plan yet to do so.

To get a better understanding, I asked Mark Faggiano, the founder and CEO of TaxJar, a service that makes post-transaction sales tax compliance easier, to explain the world-wide currency. Before founding TaxJar, Faggiano was the co-founder of FileLater which became the web’s leading tax extension service.

Here’s what Faggiano says you need to know about using Bitcoin:

Consider exchanging Bitcoins for dollars frequently. Bitcoin was extremely volatile in 2013—its value rose from $140 in October to a dazzling high of $1,237 on December 4, an astonishing 9,000 percent gain for the year. While this might seem like great news, entrepreneurs must exhibit caution with stocks that are too volatile, as they are ripe for a crash that, if you haven’t prepared for adequately, could cripple your business. It is probably a good idea to continue to do most of your business in dollars, and to exchange Bitcoins for dollars as often as possible.

Converting Bitcoins to dollars is also important when considering your business’s tax implications. If your business collects sales tax from Bitcoin transactions, you will likely want to create a system that frequently converts your sales tax collected from Bitcoins to U.S. dollars, which is the only acceptable currency used to remit payments to the IRS. By converting sales tax immediately, you lower your risk of exposure to owing more taxes than you can afford if Bitcoins fall in value.

Now that more businesses are beginning to accept Bitcoins, and the news media is running wild with stories about the currency, the IRS is [paying close attention]. Just because it’s a virtual payment that the U.S. does not yet recognize as official currency (Switzerland, China and Korea are some of the other countries that don’t recognize Bitcoin), it is still considered income, which is the operative word when the IRS demands taxes. American law generally dictates that for transactions performed in any currency, virtual or real, or even bartering, taxes still apply.

Bitcoin gained infamy and notoriety largely thanks to Silk Road, which used Bitcoins as supposedly completely anonymous payments for illicit drug transactions. However, the claims that Bitcoin purchases are untraceable being scrutinized. Entrepreneurs should be aware that while some parts of the money movement are not tracked, it usually takes several pieces of technology to make a transaction occur. Google is capable of indexing “pay with Bitcoin” buttons, and most purchases involve virtual shopping carts, inventory management software, payment gateways, and even sales tax software. Don’t make the mistake of assuming that your Bitcoin activity is truly anonymous.

Virtual currency is not a new idea, but it is getting more popular as these types of monies increase both in transaction volume and media coverage, thanks in large part to Bitcoin. The ease of pushing online “brands” of currency threatens to decimate Bitcoin’s meteoric rise in value. Just as Napster made it seem as though downloading music online was illicit before Apple swooped in and made a billion dollar business out of it, so too Bitcoin makes virtual currency seem as if it’s meant only for clandestine purchases. But now, JPMorgan Chase has filed a patent for a virtual currency that is similar in process to Bitcoin. If it proves successful, watch for more banks and financial institutions to follow suit, offering their own virtual currencies.

Rieva Lesonsky is CEO of GrowBiz Media, a media and custom content company focusing on small business and entrepreneurship. Email Rieva at, follow her on Google+   and and visit her website,, to get the scoop on business trends and sign up for Rieva’s free TrendCast reports.