Interest in cryptocurrency among consumers, businesses and everyday investors skyrocketed in 2017 as the price of Bitcoin rose from under $1,000 per coin to nearly $20,000 over the course of 12 months. Of course, today the price has leveled off to a degree, and a host of new blockchain-based currencieshave been launched and continue to be developed, some with very specific transactional and investment goals, including the promotion of social causes.
As cryptocurrencies evolve and their number expands, online retailers both large and small in the U.S. and globally are left to evaluate whether they should jump onboard this semi-regulated digital train, and if so, how.
At the same time, other kinds of organizations, from financial management businesses to non-profit fundraising groups, are examining the best way to integrate cryptocurrency use into their operational strategies. Individual investors, as well as businesses aiming to invest their assets, are also taking a closer look.
How can you determine if your company should embrace this new frontier? Perhaps the best way to start is by examining how cryptocurrency might impact your business’s bottom line. Here is a closer look at some key areas where digital currencies offer potential benefits and risks.
Reduced transaction fees
If your company is contemplating accepting cryptocurrencies (either one particular currency or multiple forms) in exchange for your products or services, one potential bottom line benefit is that there will generally be no direct processing fees. Unlike with credit card transactions, where banks serve as intermediaries and charge a fee, cryptocurrencies are decentralized, which means that transactions have no third-party involvement.
Coins and tokens are not developed or controlled by a single authority, like fiat money that is issued by a sovereign government, but instead work directly through blockchain technology. If you are a merchant selling online, you will, however, likely be charged a small flat fee for your merchant wallet account or accounts, like BitPay or CoinPayments, which allow you to accept certain cryptocurrencies.
Cryptocurrency transactions happen almost immediately, unlike credit card payments that may take days to clear. As a result, you will have access to the coin payments in minutes. Sales are also final, which means that charges cannot be negated after the fact. All of this translates into more financial security for your business.
Improved customer access
With more consumers and business customers showing interest in cryptocurrency, offering coin payment options may increase your audience of buyers. Certainly, because digital currency is non-governmental, it is by definition international, which means that your business could see an increase in global clientele, especially as use grows. Cryptocurrency of course has no exchange rates or fees across borders, and so is theoretically the perfect way to conduct global business.
Currently, fewer B2B organizations, including professional service companies, and more B2C businesses are accepting or paying with cryptocurrency, but this trend is likely to change as the marketplace evolves. Ultimately, by simply accepting cryptocurrency payments, you may boost your bottom line as you attract new customers.
Volatility in value
Cryptocurrencies are notoriously volatile, which makes them attractive to investors seeking high reward through elevated risk, but also potentially dangerous for businesses that accept them as payment. Imagine if a customer pays you in Bitcoin, and then after the transaction the value crashes – which it has been known to do across the hundreds of coins now used.
For many merchants, the volatility issue is muted by the fact that merchant wallet accounts offer immediate conversion to fiat money. Unless a crash occurs within the confines a few seconds between a payment being made and accepted, most companies are protected from volatility. For this reason, most do in fact choose to automatically convert payments to fiat. Companies that keep payments and revenue in the form of cryptocurrency are essentially taking the risk that comes with coin investment.
Lack of regulation
Cryptocurrency is still relatively new, and as a result, governments around the world have issued limited, and differing regulations. Some nations, especially the small country of Lichtenstein, have aggressively moved to embrace and promote cryptocurrency with financial incentives designed to build stability and regulatory assurance for those that use and invest in coin.
But overall, a general lack of regulations, including here in the U.S, can mean uncertainty for business that deal in cryptocurrency, including uncertainty about what kinds of taxes and investment limitations may be imposed in the future.
Taxation and accounting challenges
Companies that accept or invest in cryptocurrency will need to make the effort to understand the changing regulatory environment, and will also need to factor in the tax and accounting tasks that will be required of them.
In 2014, the IRS released IRS Notice 2014-21, which declared that for U.S. income tax purposes, a cryptocurrency is property and not a currency. Depending on the facts, that means the character of the cryptocurrency could be business property, investment property, or other property. Therefore, the general U.S. tax principles that apply to any property transaction should be applied to exchanges of cryptocurrencies.
Cryptocurrencies held for investment and sold for a gain are subject to short-term or long-term capital gains tax. Conversely, those investment-held cryptocurrencies sold for a loss are able to utilize a capital loss. The IRS notice does not, however, resolve all issues related to reporting requirements or taxation. Some of the unresolved issues include foreign account reporting, cryptocurrency as “like-kind” exchanges, and taxation of crypto-forks.
To keep track of the complex and evolving regulatory environment, and to understand the full range of financial implications of using, accepting or investing in cryptocurrency, you would be well-advised to start by talking to your financial and tax advisors today.