Cryptocurrency: Is Your Business Ready?
Over the last year, the United States government found itself embroiled in a battle over the country’s tax code. For months there were daily reports seemingly contradicting each other, public relations wars waged on both sides, and (dis)information campaigns aimed at shooting down the other side’s ideas.
All the while, business owners and their finance teams were left wondering what was going to happen, and how it would affect them. As the days turned into weeks, and the weeks into months, anxiety was growing as the bill was changed over and over again.
Finally, it passed, but that just led to the process of now having to actually study it, understand it, and figure out how to best position your business under the new regulations.
In short, it was a whirlwind for finance and accounting professionals, and took up no small amount of their time and energy over the last year. As a result, you and your team can be forgiven if the consternation over taxes caused you to overlook the other ground-shaking finance event of the past 12 months: the explosive rise of cryptocurrency.
Indeed, as you worried about taxes, cryptocurrency, which had previously been a movement in the digital underworld, exploded into the mainstream. As that happened, it led to a laundry list of questions from business owners, not the least of which was, “Well, what exactly is cryptocurrency?” “Does my business need to get into the cryptocurrency game?” And not the least of the questions might have been, “What exactly are we supposed to do with money that isn’t actually money?”
All valid questions, and to put it simply, cryptocurrency is an online-based currency with a limited number of units, using cryptography to secure and verify transactions and control production of new units. That’s why you heard about Bitcoin value exploding over the last few months – interest in it grew, and there’s only a limited number of units available. In essence, it’s a classic example of supply and demand, but for currency instead of a particular good.
Now, this isn’t to say that if you own a clothing store that tomorrow someone is going to walk in the door and try to pay for a shirt with Bitcoin (although it’s certainly possible). But for businesses with a heavy online presence, it’s becoming necessary to make sure you have a cryptocurrency strategy, both in terms of whether you accept it, and if so, how your finance group accounts for it.
To that end, Qount has compiled a list of tips business owners should consider heeding if they’re to wade into the world of cryptocurrency.
Take the Long View
Is cryptocurrency the wave of the future, where cash becomes meaningless? Or is it bound to fade away, the financial version of fidget spinners? (And woe be the entrepreneur who filled a storage unit with thousands of fidget spinners last year only to have the fad fizzle faster than New Coke.)
After riding a massive wave last year, there have been signs in 2018 that cryptocurrency is wobbling. Apart from financial machinations, there is a major PR problem: that Bitcoin and other cryptocurrencies have helped enrich the purported alt-right and other extremist organizations. That alone sent many running in the opposite direction. If that weren’t enough, cryptocurrencies require such a tremendous amount of computing power, entire countries could be powered by the energy necessary to keep the system running as they mine for new units. Consider this, from the New York Times:
“…the computer power needed to create each digital token consumes at least as much electricity as the average American household burns through in two years, according to figures from Morgan Stanley and Alex de Vries, an economist who tracks energy use in the industry.
The total network of computers plugged into the Bitcoin network consumes as much energy each day as some medium-size countries — which country depends on whose estimates you believe. And the network supporting Ethereum, the second-most valuable virtual currency, gobbles up another country’s worth of electricity each day.”
While there are efforts to reduce that usage, they can’t bring it down overnight. But step away from the pure PR issues – there are financial ones too. When the SEC demanded that cryptocurrencies register with the agency, their value tanked.
Maybe these are the inevitable ebbs and flows of a new technology and cryptocurrency will settle into more predictable patterns. Or maybe these are signs of long-term trouble. In other words, keep a very close eye on it.
Over the last year, how many companies have had to come forward and sheepishly admit that their customers’ data may have been hacked and exposed to nefarious online actors? It’s a common refrain, and one that consumers are tiring of.
With cryptocurrency, those worries can be significantly lower. The identities of Bitcoin users are obscured, and the cryptology of the currency prevents many would-be fraudsters from viewing or tampering with the exchange.
And along with the security aspect of cryptocurrency, that anonymity could be appealing to people or businesses who prefer to keep their transactions confidential. If you’re a business with a high-end clientele who value their privacy, cryptocurrency could be a way to keep those customers happy, and ensure they remain return customers.
That said, the security isn't fool-proof, crimes do happen, and there's even a forensic team dedicated to tracking down perpetrators of cryptocrime.
Lower Transaction Fees
Hardly anyone pays for anything in cash at brick-and-mortar institutions, and there are credit card fees, and online processing payment systems fees that ultimately take money from the pockets of customers and businesses. With cryptocurrency, fees can be either non-existent or just a few cents per transaction.
This is particularly palatable to online-based business – whether it’s credit cards, PayPal, Apple Pay, Square or another form of e-commerce payment, each transaction is usually subject to a percentage going to the financial institution behind each one. That’s not the case with cryptocurrency, where accepting Bitcoin or something of its ilk is the online version of physical cash – an entity that is passed from person directly to another with no middleman in between taking a cut.
Security and lower fees are practical reasons to accept cryptocurrency, but there are PR and economic realties that tilt the ledger the other way. Business owners needs to find a balance between the two to determine if it’s a good fit for them. But another practical concern is taxes, and how cryptocurrency is dealt with on that front.
As stated above, there is a new tax code for business owners to navigate and working through cryptocurrency is part of it. As Forbes notes in this piece, it’s been years since even the IRS has offered formal guidance on cryptocurrencies for tax purposes:
“The last time that the Internal Revenue Service (IRS) issued specific guidance on the tax treatment of virtual currency to taxpayers was on March 25, 2014, at a time when about $14,020,100 worth of Bitcoin was trading at around $585. As of this writing, volume share is approximately $4,631,500,000 trading at around $7,500 a pop. And that’s just bitcoin (BTC). It doesn’t include other virtual currencies like Ripple or Ethereum.”
With so long since the government watchdog has issued formal guidelines on cryptocurrency taxation, experts in the accounting industry are calling for an update.
In the meantime, there’s an impetus on business owners to make sure they handle cryptocurrency properly in their tax returns, and CNN Money has compiled a to-do list to ensure you remain on the government’s good side, particularly if you sold Bitcoin in the past year.
While cryptocurrency has been around for several years, it can still feel very much like the Wild West for accountants and finance experts. Anytime there’s a major disruption in the financial world, it takes time to for the dust to settle and people to figure out where things land.
Which brings us back to the beginning: should you take the plunge into cryptocurrency with your business? Well, none other than Apple Co-founder Steve Wozniak is a true believer: “I believe so much strongly in mathematics and purity and science… Bitcoin is mathematically defined. It’s pure. There’s no human and company run in it. To me, that’s natural and more important than human conventions."
So a legendary figure in the tech world loves it (despite an anecdote towards of the end of the article where he relates a story of being ripped off by someone with a phony credit card, thus reiterating security concerns mentioned earlier), but there are real-world concerns and risks business owners have to factor into their decision-making.
That’s where Qount can come in. Our experts and software are constantly monitoring the latest in cryptocurrency and every other change to the financial world, and we can provide expert advice to let you know which road to take. Visit our site to see what Qount can do for your business, and contact us to get our take on the viability of cryptocurrency for your business and how to handle its accounting.