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Updated on Thursday, September 19, 2019
If you think of yourself as an early adopter of emerging trends, you may be wondering how to accept cryptocurrency as payment for the goods and services your business sells. Accepting cryptocurrency could open an additional revenue stream for your small business and help you reach new customers, said Dennis Murphy, Ohio-based certified public accountant and principal at financial advisor firm Skoda Minotti. And some processing services are making it easy for business owners to take Bitcoins and other digital currencies as payment.
However, cryptocurrency is highly volatile, and may not be ideal for risk-averse business owners. Continue reading to determine if accepting cryptocurrency could be beneficial for your business and how to receive this type of payment.
What is cryptocurrency?
Cryptocurrency is a digital exchange currency that uses cryptography to transfer value from one person to another online. It relies on what’s known as the blockchain, a public digital ledger that records all transactions anonymously in chronological order. Using a personalized digital key, anyone can add transactions to the blockchain. This technology secures the exchange of cryptocurrency.
There are thousands of types of digital currencies traded on a daily basis. Bitcoin and Ethereum are among the most popular cryptocurrency, as they have the highest value. Also among the top cryptocurrencies are XRP, Bitcoin Cash and Litecoin.
A small portion of businesses accept cryptocurrency, hovering around 1% to 3%, said Matthew May, co-founder of Atlanta-based financial firm Acuity, and most of these companies accept Bitcoin.
How it works
The value of cryptocurrency is derived from supply and demand. For instance, the more people who want to buy Bitcoin compared to how much is available determines its value. The value of cryptocurrency fluctuates to reflect both factors. Cryptocurrency can be converted into fiat currency, like U.S. dollars, or another type of cryptocurrency.
Only some cryptocurrencies, including Bitcoin, can be directly exchanged for USD. Others must be converted into those types of cryptocurrency before being converted into cash, May said.
Digital wallets hold cryptocurrency and record the value of coins. Wallets also verify transactions and the number of coins in storage. Cryptocurrency storage can be considered “hot” or “cold,” Murphy said. A wallet that is connected to the internet would be hot, while a storage device such as a USB drive would be considered cold.
To trade or make purchases with cryptocurrency, you’d need to keep it in a hot wallet. It’s best to move coins onto cold storage devices if you don’t plan to trade frequently to keep it safe, as online cryptocurrency storage is vulnerable to hackers, Murphy said.
Accepting Bitcoin as payment
Anyone with a cryptocurrency wallet could individually transfer Bitcoin to another person. To accept a payment, you would need to display a QR code that connects to your wallet, which the other person would scan to transfer Bitcoins to your account. You wouldn’t owe a fee for accepting cryptocurrency payments, though some wallets charge a fee for spending.
You could also accept cryptocurrency in a way that is similar to accepting credit cards and allows you to convert your coins into cash. You’d need to sign up for a payment processing system that would simplify the process of receiving cryptocurrency, May said.
A common option for businesses is BitPay, a payment processor designed specifically for Bitcoin transactions. Businesses can accept Bitcoin payments online, via email or in person using the BitPay app, which we’ll describe in more detail, below.
Businesses that frequently make international transactions could benefit most from a service like BitPay, May said. Exchanging cryptocurrency could be a less expensive option for selling goods and services across borders, as the exchange rates for fiat currencies wouldn’t apply.
“It might be easier for somebody to get Bitcoin than the U.S. dollar,” May said. “It might be cheaper for them.”
To sign up for a BitPay merchant account, you would need to submit an application with your business name, address, industry and website, as well as a few personal details like your name and date of birth. BitPay charges a 1% fee on each transaction and allows unlimited monthly transactions. You can choose to receive payments in Bitcoin or a fiat currency of your choice, including USD, and BitPay would make the exchange for you.
Payments made through BitPay wouldn’t be subject to price volatility, and you would receive the exact amount that you charge minus BitPay’s 1% fee, regardless of the change in value of Bitcoin. For online transactions, BitPay provides payment buttons, embeddable invoices and check out services for your website.
How to use the BitPay app
If you want to accept Bitcoin payments in person, you could use the BitPay Checkout app for Android and iOS devices. When using the app, you would enter the amount owed and BitPay would generate an invoice for your customer. A QR code would appear on your device, and the customer would scan the code to access and pay the invoice from their device. Customers would pay directly from their own Bitcoin wallets.
Several cryptocurrency apps provide the same service and could integrate with your current POS system. Coinbase, Coinkite, MyEtherWallet and Sia wallets provide apps that facilitate transactions for different types of cryptocurrency. Customers could scan a QR code, manually input a code or otherwise connect with your device to pay you in cryptocurrency.
Converting cryptocurrency into cash through a service like BitPay as soon as you receive a payment would be a smart strategy if you don’t have much experience with digital currency, Murphy said. You wouldn’t have to worry about a change in value that could occur if you hold onto coins.
“That’s the best thing to do if they want the easiest compliance, easiest reporting and easiest accounting,” Murphy said.
We’ll dive into compliance and reporting in the next section.
The advantages and disadvantages of accepting cryptocurrency
Legal and tax implications
Because cryptocurrency is decentralized and transactions are considered peer to peer, Bitcoin and other coins aren’t subject to the same treatment as money in a bank, Murphy said. But you still must meet IRS requirements if you accept cryptocurrency in a business transaction.
The IRS treats cryptocurrency as property, similar to a stock, bond or other trading security that can be sold for a profit, Murphy said. Each time you sell or recieve cryptocurrency, you must report any gains or losses you generate from a cryptocurrency transaction, he said.
If you keep cryptocurrency for too long after a business transaction, you may need to report a personal gain or loss from that payment. For instance, if a customer paid you $10 in cryptocurrency for a notebook, but the currency appreciates to $15 before you convert it to dollars, you would then need to report a capital gain because the original sale was recorded as $10, Murphy said. If you converted the $10 into cash right away, you wouldn’t need to worry about recording an additional gain or loss based on market fluctuation.
“It’s best if business owners convert it into USD and don’t ever see the cryptocurrency,” Murphy said.
However, it is legal to keep a cryptocurrency payment in coin form as an investment, Murphy said. You could even convert a portion to cash and keep the rest as coin. You would just need to make sure you accurately report how much you earn or lose from that investment.
Third parties that handle digital currency transactions on behalf of businesses must issue a 1099-K form to merchants summarizing all payments. BitPay, for instance, would report the USD equivalent of your transactions to the IRS and send you a 1099-K with the same information.
You would only receive a 1099-K form detailing your transaction history if you’ve received more than $20,000 and made more than 200 transactions throughout the year. The purpose of a 1099-K is to help you make sure you accurately report your business income when filing income taxes. It would be your responsibility to report any gains or losses from cryptocurrency when you file your income taxes, Murphy said.
“It’s all voluntary,” he said. “It’s all self-reporting up to this point.”
If you fail to properly report income received through cryptocurrency transactions, you could face an audit or more extreme penalties. You could be subject to criminal charges such as tax evasion or filing a false tax return, which could result in three-to-five years of prison time and a fine up to $250,000.
The federal government in the U.S. does not recognize cryptocurrency as legal tender, but cryptocurrency exchange is regulated at the state level, although at varying degrees. While some states have not issued any guidance regarding digital currency, others require businesses to obtain special licenses to handle Bitcoin and other cryptocurrency. Check your local laws or consult an attorney to ensure you remain compliant when accepting digital currency.
Is cryptocurrency right for your business?
The main factor to consider before accepting Bitcoin or other digital coins is whether your customers or clients want to make payments with cryptocurrency, May said.
“If you’re an early adopter, you’re probably already in,” May said. “If customers aren’t asking for it, I wouldn’t worry about it right now.”
If you do have customers ready to pay with digital currency, it wouldn’t hurt to set up an account with a service like BitPay, Murphy said. You may find it’s more affordable than accepting credit cards. BitPay charges a 1% fee, while major networks like MasterCard, Visa, Discover and American Express charge average credit card processing fees of 2% or more.
“For those businesses looking for ways to reduce payment processing fees, it’s good for that,” Murphy said. “Just make sure it’s done securely.”
Payment processors like BitPay reduce risk for business owners accepting Bitcoin, as it can immediately convert payments to cash. If you don’t hold onto coins for personal investment, you wouldn’t need to worry about a change in the value of the currency or reporting capital gains or losses when filing taxes.
Cryptocurrency is far from becoming a replacement for standard currency, May said, so business owners shouldn’t feel pressured to accept Bitcoin or other coins as payment. But digital currency could become mainstream in the near future, he said. It may be worthwhile to learn more about how cryptocurrency could potentially benefit your business.
“Think about how little cash you carry around versus ten years ago,” May said. “I think it’s coming – it’s just a matter of when.”