Introducing Bitcoin
Bitcoin, which began in 2008, has entered the vernacular. It’s not the only virtual currency out there, but it’s the one that most people know about. At present, a number of major companies, including Microsoft, Intuit, and Shopify.com, accept Bitcoin as payment. The question is whether you should too.
Understanding Bitcoin
Bitcoin is one type of an Internet-based “digital currency.” It is based on a protocol that enables payment to be made between parties without an interim, such as a bank or credit card company. The value of Bitcoin fluctuates, so it can’t be said that one Bitcoin equates to a fixed dollar amount. In fact, the current value of Bitcoin is now part of the daily market quotations, along with stocks and bonds. As of August 16, 2019, the value of Bitcoin was a little over $10,000.
Pros and cons for your business
Here are some good reasons to consider accepting Bitcoin (adopted from Bitcoin’s site), as well as some cautions:
Pros:
- There are less processing fees than other payment methods, such as credit and debit cards or PayPal.
- There are no chargebacks, as can occur with credit and debit cards or PayPal.
- It can be used worldwide.
- There is accounting transparency. You can provide information to verify your transactions through the blockchain.
- It can be a marketing tool to promote your business as being in the digital world.
Cons:
- The value of Bitcoin changes throughout the day and can be downright volatile. It reached an all-time high on December 18, 2017, at $20,089. It’s currently valued about half that, but it’s expected to go higher (John McAfee predicts it will be valued at $1 million in 2020).
- Bitcoin can be stolen by hackers. For example, it was reported that 7,000 Bitcoin valued at over $40 million was stolen from Binance, a major cryptocurrency exchange.
- The federal government views it as property, not as currency (see Tax Implications, below). I listed this as a con, but it’s really not a negative, just a hassle.
Tax implications
The IRS treats virtual currency as property, not as currency. Thus, if you’re self-employed and accept it as payment for goods or services, it’s self-employment income. It’s also taken into account for self-employment tax purposes. If you’re incorporated, the business similarly includes payments in virtual currency in its income.
The amount you report is based on the fair market value of the virtual currency on the date the payment is received. If the virtual currency is listed on an exchange where an exchange rate is established by supply and demand, then this rate can be used.
Payers must issue Form 1099-MISC to contractors when total payments for 2019, including the value of the payments in Bitcoin or other virtual currency, are $600 or more. (For such payments in 2020 and later, Form 1099-NEC will be used instead.) If you’re accepting Bitcoin through a crypto exchange such as Coinbase, Gemini, or GDAX, and have more than 200 transactions totaling more than $20,000, the crypto exchange must issue you a Form 1099-K for your virtual currency transactions each year.
Caution: Don’t assume that because Bitcoin is virtual the federal government doesn’t know about it. In 2019, the federal government won a case requiring Coinbase, a digital wallet where Bitcoin can be kept, to divulge the accounts that had at least one transaction of $20,000 or more during 2013, 2014, and 2015 impacting an estimated 14,000 customers. Recently, the IRS began to send letters to taxpayers advising them of the need to report Bitcoin transactions and suggesting (strongly to some taxpayers) that they file amended returns to include omitted transactions.
Conclusion
Whether you jump on the Bitcoin bandwagon depends on your business and your comfort level. As time goes on, transactions in virtual currency likely will become more common. Watch for developments from the SEC, major banks, and the government for growing acceptance for the use of digital currency.
