Is cryptocurrency a viable payment or investment opportunity for your small business? What exactly is cryptocurrency? Simply put, it is an online digital currency, protected by strong cryptography, without a central authority or regulator. The key innovation that makes this possible is blockchain technology. Blockchain is a public ledger distributed among all network users. Blockchains ensure all transactions show in each and every user account almost simultaneously with their recording. This makes data impossible to alter and provides security. The most well-known cryptocurrency is Bitcoin. Bitcoin has been around for about 10 years now. Government and banking institutions have no direct control over the currency or transactions. Here are some of the pros and cons of cryptocurrency use for small businesses:
Cryptocurrency permits global transactions. The blockchain technology records and secures them for each user. Anonymity is at least partially protected by the system, although cryptocurrency can be linked to specific digital addresses. Cryptocurrency is a comparatively rapid method of payment. Transaction fees are generally very low. Free transactions are possible but can greatly increase transaction completion time. Cryptocurrency acceptance can attract sales from those otherwise not in the market. Cryptocurrency supply is limited by control of the tokens. In Bitcoin, for example, the supply of tokens will increase until it reaches a maximum in approximately the year 2140. While volatile now, these attributes combine to make cryptocurrency a potentially lucrative source of income and a protected way to make and receive payments. Cryptocurrency has become a high risk opportunity for speculative investment. A Forbes article by Kashmir Hill in 2013 touted Bitcoin as the best investment of the year.
The lack of regulation of cryptocurrency is similar to that of some cash transactions. On the negative side, anonymity and ease of transfer attract criminal and dark web elements. Cryptocurrency is volatile and not yet universally accepted. Once cryptocurrency transactions are made, there is no way to reverse them. Also, while cryptography may make the cryptocurrency itself secure, cryptocurrency exchanges, used by many, are vulnerable to scams or hacking. Processing time of some transactions has also hindered commercial use by merchants. Cryptocurrency has no universal legal status, and is in fact banned in a number of countries. Cryptocurrency is not backed by any external substance of value. Lack of regulation safeguards increases the risks of price swings, theft, and market manipulation.
Cryptocurrency Accounting for Small Businesses
What does all this mean for small businesses? Cryptocurrency transactions bring both dynamic new opportunities and risks. Care must be exercised with Bitcoin or other cryptocurrency transactions. Those who do utilize cryptocurrency must follow all applicable tax regulations. In the United States, the IRS generally considers cryptocurrency to be property. As the IRS notes, cryptocurrency may operate like real currency but does not have legal tender status. Wages paid, income earned, or other transactions made utilizing cryptocurrency must be recognized and generally accepted accounting principles followed. The wisest course before engaging in investment or business transactions with cryptocurrency is to seek expert advice. Consult a reputable professional accounting firm such as Chandler & Knowles CPs, PLLC concerning all cryptocurrency tax regulations and accounting implications for small businesses.