While it’s certainly not for everyone, there are certain circumstances in which some limited involvement with cryptocurrency can make sense for traditional companies. For both tax and business reasons, it’s important to proceed with caution.
Accepting Cryptocurrency From Customers
For companies targeting young, affluent customers with goods such as jewelry, cars, and high-end electronics, accepting cryptocurrency for payment can be a savvy move. The hundreds or even thousands of new crypto millionaires created each day during price surges may appreciate not having to convert to a traditional currency to make a major purchase.
Payment service providers specializing in cryptocurrencies function almost like credit card processing companies and can enable businesses to accept bitcoin and other digital currencies for payment without having to hold them in a digital wallet. That eliminates exposure to market volatility and greatly simplifies bookkeeping.
In addition, the processing fees charged by cryptocurrency payment service providers are often quite low, typically 1%. That is substantially lower than the rates for credit card processing and just as easy to use once it is set up.
Using Cryptocurrencies to Make Payments
One of the primary use cases for cryptocurrencies is that they are not subject to foreign transaction fees. Companies with suppliers and vendors around the world who accept bitcoin for payment may find savings by using digital currency to pay their invoices. However, doing so doesn’t alleviate reporting requirements and likely means the company will have to keep some cryptocurrency on hand, which presents security and financial risks.
Whereas banks can reverse fraudulent transactions, there is no recourse other than the legal system if cryptocurrencies are stolen. Closely managing who has access to the company’s digital assets is crucial because if they are stolen, they won’t be retrieved. For this reason, cybersecurity measures to protect your accounts from hackers are paramount as well. Even the hackers who extorted millions in the Colonial Pipeline cyber-attack were unable to keep their bitcoin passwords secure enough to prevent investigators from taking a large portion of the funds back.
Holding Cryptocurrency as an Investment
Let’s be real — you’re no Elon Musk. For most companies, buying cryptocurrency as an investment would be a bold foray into new territory.
Bitcoin recently lost 50% of its value in a week following a nearly 2,000% gain in a year. The volatility swings both ways, and from a treasury perspective, it’s risky. Since you don’t pay rent or employees in bitcoin, it’s easy to end up token-flow positive and cash-flow negative during a market correction.
Plus, generally accepted accounting principles (GAAP) treats digital currencies as intangible assets, which are subject to impairment. Since intangible assets are precluded from recording an increase, from an accounting perspective Bitcoin is essentially an asset that can go down in value but not up.
If your organization ever wanted to own volatile assets, they’ve always been available. Does your company own highly leveraged options? If not, it probably shouldn’t own Bitcoin, either.
The IRS is placing increased scrutiny on cryptocurrency transactions, so if your company is directly handling cryptocurrency it’s important to track it carefully for tax purposes. To be honest, I’ve never seen a company do this perfectly.
You have to track the U.S. dollar movement from the day you received cryptocurrency to the date of disposition and apply a basis to each one of your sales. There is software that can manage this, which is an absolute must if you have more than a few transactions.
It may seem simple enough to scale to thousands of transactions, but it’s not. Exchanging one cryptocurrency for another complicates matters further. Each transaction is treated as a sale and a purchase — and therefore a profit or a loss — rather than an even exchange.
With soaring crypto prices making headlines over the past year, it’s easy to feel like you’ve missed the boat. I believe we’re still in the infancy of the new paradigm of digital assets. CFOs who are even considering involving their company in cryptocurrency are ahead of the game. If you find a way to do it that makes sense, that’s great. But there’s no rush.
Justin Wilcox is a partner at the Connecticut accounting and advisory firm FML where he leads the firm’s cryptocurrency practice.