A growing number of small businesses are accepting cryptocurrency. But there’s a lot to understand if you want to try it with your company.
Digital currency may not be quite mainstream yet, but a growing number of companies are now are accepting Bitcoin as payment. The question is, should your small business do so too? The answer depends on your business goals, and exactly what you plan on doing with your digital gains.
Let’s start with a definition: Bitcoin is just one type of cryptocurrency, which is decentralized, digital currency that can be used to buy goods and services but can also lose or gain value, like stocks. Many companies have turned to crypto during the pandemic to store their cash reserves, viewing currencies like Bitcoin as a safe bet amid economic uncertainty. Bitcoin, and most other crypto, is considered to be immune from inflation since there is a fixed supply of it and the government can’t manipulate its value. However, its value is tremendously volatile, so relying on it comes with an element of risk.
Bitcoin is still by far the most common cryptocurrency accepted by businesses as payment, though Ether, the second-largest cryptocurrency, is gaining ground. For companies with customers from around the world, adopting Bitcoin has become a way to avoid banks’ transaction fees and long processing times, as well as the added task of converting to a different currency.
To get started, you will first need a bitcoin wallet, which allows you to buy, store, and sell the cryptocurrency. Bitcoin wallets come with private keys, or a secret number that allows the holder to access their crypto. You can also get a “hardware wallet,” which requires you to either write down your keys or keep them on a hard drive to avoid storing them online. Companies can also sign up with a crypto exchange such as Coinbase or Lumi Wallet, which store keys on a third-party server. Bitcoin.org has a helpful tool that can help you select the wallet that is best for your business.
If you’re an online merchant who wants to accept payment in Bitcoin, platforms like Etsy and Shopify have partnered with payment processors like Coinbase Commerce and Bitpay, which allow e-commerce stores to accept Bitcoin. Business owners can also sign up on Coinbase Commerce and other payment processors directly. Such payment processors are free to set up and allow merchants to directly accept crypto payments from customers anywhere in the world.
But small-business owners should keep a number of things in mind before accepting crypto. Ali Hamam, vice president of Ontario-based restaurant chain Tahini’s Mediterranean Cuisine, converted all of his business’s cash reserves into Bitcoin as an inflation hedge last year, but he’s less enthusiastic about the currency as a payment method.
“For us, there are a lot of cons with accepting Bitcoin payments right now,” he says. The many expenses restaurants have, including employee salaries, supplier fees, and rent, all need to be paid in traditional, non-digital money. And at least for now, he says, there’s the issue of public awareness: “Ninety-five percent of our customers haven’t even heard of Bitcoin.”
Another major issue around accepting Bitcoin is the tax implications. Back in 2014, the IRS made a key decision on virtual currency to essentially treat Bitcoin as property for tax purposes. Businesses that choose to accept Bitcoin or any other cryptocurrency must report it as gross income based on its fair market value when it was received. In other words, each time you sell, buy, or use Bitcoin, you’re subject to a capital gains tax.
As Accounting Today points out, any business selling its Bitcoin needs to keep track of its value the day it was received and the day it was sold, and also factor in other variables that can adjust the total amount owed. For small businesses dealing with several transactions a day, that can get very complicated. A general rule is that small businesses should accept crypto only for big-ticket, luxury purchases rather than smaller, more frequent ones.
And of course, since every transaction is anonymous, crypto is the currency of choice for many bad actors, including drug lords and black hat hackers. In some countries, including India and China, Bitcoin is illegal. In the U.S., treasury secretary Janet Yellen called the misuse of cryptocurrency a “growing problem” and signaled a need for further regulation. If you’re set up to accept it as payment, you’ll need to stay current on the rules.
Finally, Bitcoin’s staggering volatility dissuades many people who hold it from touching it. If you purchased $100 worth of Bitcoin in 2014, it would be worth more than $12,000 today. This is why consumers tend to steer clear of spending their Bitcoin on small purchases–and why you may have trouble finding enough customers to warrant setting up crypto payments to begin with. And if you do decide to go for it, remember that the volatility is a double-edged sword: Unless you cash Bitcoin payments immediately, there’s always the chance of the currency’s value taking a dive and damaging your bottom line.
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Original source: Inc.