By Judith Herron, CPA, and Alyzabeth R. Smith, CPA
To the layman, “cryptocurrency” sounds arcane. But bitcoin and its siblings could be good tools for businesses looking to securely transact payments and more. With over 1,000 digital currencies in existence, defining what they are and how they fit in a business model might seem daunting.
As a business, once you start accepting cryptocurrency you’ll be joining a fraternity of well-known companies, including Expedia, QuickBooks, Overstock, and PayPal. To get started, the first step is to select a payment processing provider, such as Coinbase or BitPay. Next, open a business account with the payment processing provider. Processing fees can be minimal, but may vary with transaction volume. Low-margin businesses based on small transactions might find accepting bitcoin a challenge because of process timing and fees. Bitcoin transaction processing can range from a few minutes to several hours, and on-the-go customers may not want to wait.
As cryptocurrency use progresses, processing time is expected to decrease substantially. Mastercard recently patented a procedure that expedites cryptocurrency payments. PayPal filed a patent application for a payment process that creates secondary wallets for users and allows them to exchange private keys. Many institutions have begun the research and development process involved with shortening processing time, but a widespread solution has yet to arise.
Considering the current state of processing, one possible cryptocurrency candidate that might not be deterred by the lag time is the car dealership. A wait of minutes or hours would not affect merchandise utility, and the price structure for each item sold could cushion the impact of processing fees. Bitcoin may also be a viable opportunity for enterprises involved in legal-cannabis-related commerce, given that traditional banks may shy away from money derived from that source.
Bitcoin received by a business can be used for purchases or investment. Exchanges like Coinbase attempt to insulate you from cryptocurrency’s inherent volatility by fixing the price at the point in time that you click “buy” or “sell.” This set price lasts for the time it takes for that single transaction to be processed. By fixing the price for the duration of the transaction, buyers and sellers know what they’ll have to pay or what they will get back without the value changing during the processing time.
If you choose to convert bitcoin receipts to cash, you will have to sell your bitcoin on the exchange where the bitcoin wallet is held. A bitcoin wallet is a virtual compartment where the cryptocurrency is stored. The virtual wallet is accessed through a private key, which must never be lost. Retrieving a private key is impossibly difficult, and without your private key you would lose access to your bitcoin. No single governing entity controls bitcoin, so the result is more autonomous responsibility and administration on behalf of the bitcoin wallet holder.
To process a conversion, you will need to enter the amount of local currency that you wish to receive. The amount of bitcoin that corresponds to the local currency requested will automatically be calculated at the current exchange rate. When your bitcoin is “sold,” depending on the exchange used, you should have options to transfer the local currency to a bank account or receive another form of payment. Keep in mind, the IRS regards cryptocurrency as property. So, selling bitcoin could result in a taxable transaction that would need to be reported on your tax return.
One of the primary draws to cryptocurrency is the additional security that is fundamental to its design. While not foolproof, hacking a bitcoin transaction is more difficult than hacking your bank account or the bank itself. Since its public introduction in 2009, bitcoin usage and investment has grown enormously. And as the processing of cryptocurrency improves, business processes are expected to become more efficient.
A colleague’s story of resolving a property damage claim with an insurance company illustrates how smart contracts and cryptocurrency can improve business processes. First, he had to wait for the check to arrive in the mail. Then he had to drive an hour to go to the bank assigned to his mortgage, have them cosign, and then drive to his bank to make the deposit. The check was greater than $10,000, so another four- to five-day wait was required before the check cleared. Cryptocurrency would have allowed the insurance agent to directly remit remuneration to the claimant’s cryptowallet, the mortgage bank could have received a smart contract of the claim, and then contractors could have been paid immediately upon completion of work.
Speed and market volatility are big issues currently being addressed in the world of cryptocurrency. The IRS has yet to issue definitive guidance on how to value virtual currency for purposes of calculating gain or loss. While there are still many unanswered questions, as cryptocurrencies become increasingly embedded in commercial operations, it behooves modern businesses to identify how and if virtual currency has a place in the business model. The industrial and digital revolutions were not without obstacles, but the gains ultimately were too advantageous to be thwarted. Many see this repeating with cryptocurrency.
Judith Herron, CPA, works at Markovitz Dugan & Associates. She is a member of PICPA Council and is a past chair of the CPA Image Enhancement Committee. She can be reached at firstname.lastname@example.org.
Alyzabeth R. Smith, CPA, is a senior associate with Siegfried Advisory in Wilmington, Del. She is a member of PICPA Council, serves as chair of the CPA Image Enhancement Committee, and is a member of the Pennsylvania CPA Journal Editorial Board. She can be reached at email@example.com.