The core rule
When you receive Bitcoin as payment for goods or services, the IRS treats it as ordinary business income — exactly like receiving cash or a check. The amount of income is the fair market value of the Bitcoin in US dollars at the moment you received it.
This means if a customer pays you 5,190 sats for a $5 coffee, you have received $5.00 of taxable income. Simple enough.
The dollar value that matters for taxes is the price at the exact moment of the transaction — not when you convert the Bitcoin to dollars, not when you file your taxes.
What records you need to keep
For each Bitcoin payment you receive, record the following:
- Date and time of the transaction
- Amount in satoshis received
- Dollar value at the time of receipt
- What it was for — product sold, service rendered
- Transaction ID if available from your payment processor
Square’s dashboard provides most of this automatically. Export your transaction history monthly and store it with your other business records.
The cost basis question
If you convert Bitcoin to dollars immediately through Square, cost basis is simple — you received $X of income and immediately have $X of cash. No further tracking needed for that Bitcoin.
If you hold any Bitcoin rather than converting immediately, you now have a capital asset with a cost basis equal to the dollar value when you received it. When you later spend or sell that Bitcoin, you will owe capital gains tax on any appreciation.
You receive 10,000 sats when Bitcoin is at $90,000. Cost basis = $9.00. Six months later Bitcoin is at $120,000 and you spend those sats. You owe capital gains tax on $3.00 of appreciation.
Short-term vs long-term capital gains
If you hold Bitcoin for less than one year before spending or selling it, any gain is taxed as ordinary income at your regular tax rate.
If you hold for more than one year, gains are taxed at the lower long-term capital gains rate — 0%, 15%, or 20% depending on your income.
Most merchants who convert to dollars immediately do not need to worry about this distinction.
Does Square report to the IRS?
Yes. Square issues a 1099-K to merchants who process more than $600 in payments in a calendar year — the threshold that applies to third-party payment processors under current IRS rules.
This 1099-K covers your total Bitcoin payment volume. You need to report this income on your business tax return regardless of whether you receive a 1099-K.
Practical workflow for merchants
The simplest compliant approach:
- Enable auto-conversion to USD in Square settings — this eliminates holding risk and capital gains complexity
- Export your Square transaction history monthly
- Keep a record showing each Bitcoin transaction and its dollar value
- Give this to your accountant at tax time along with your other business records
The BitcoinUnit converter shows live prices but for tax records, always use the price recorded by Square at the exact moment of the transaction. Square’s records are timestamped and IRS-compliant.
Not tax advice
This article is for educational purposes only and does not constitute tax advice. Tax law is complex and changes frequently. Always consult a qualified tax professional for advice specific to your situation.