Loyola University Chicago School of Law, JD 2023
Cryptocurrency is a relatively new form of currency that has risen in popularity worldwide. Since the pandemic struck, many small businesses have begun to accept cryptocurrency as a form of payment for their goods and services. There is much debate regarding taxation and auditing of cryptocurrency transactions in small businesses, along with weighing the cost and benefit of providing this alternative payment method.
What is cryptocurrency?
Cryptocurrency is essentially digital money. There is no physical bill or coin, and cryptocurrency is digitally exchanged online through methods of cryptography — the process to transfer value from one person to another. The usual form of cryptocurrencies is based on digital coins that are used like money to buy, sell, or invest. Some specific cryptocurrencies have other abilities as well though. However, the most important aspect of cryptocurrency is that it is decentralized. The decentralization, unlike to the U.S dollar, means that crypto is not backed by governments, banks, or any other central authority. Many merchant services such as Coinbase and Bitpay allow consumers to store and manage their cryptocurrencies through their service, which acts as a digital wallet. These services also allow the value of cryptocurrency to be exchanged for cash at the market value of the cryptocurrency.
The risk of obtaining cryptocurrency as a form of payment
The technical barrier faced by small businesses setting up secure cryptography technology could prohibit use by owners who are unfamiliar with the technology. The volatility of cryptocurrency often makes the worth extremely unpredictable. Small businesses may exchange their cryptocurrency for immediate cash payments by utilizing merchant services such as BitPay or Coinbase. These cash exchanges can decrease volatility. A small business that holds onto this uncertainty is essentially gambling with its own revenue stream because the free market of cryptocurrencies is very volatile.
The future of cryptomarket regulation
As cryptocurrency continues to grow with consumers who believe in the cryptography system, it has also attracted attention from the Internal Revenue Service, which has proposed guidance to the future of cryptomarket regulation. To date, the IRS treats virtual currencies as property, which means that they are taxed in a manner similar to stocks or real property. This is similar to the taxable capital gains of stocks or real property. Whenever you sell your cryptocurrency and you achieve a profit, it will be considered a “taxable event” and will be subject to capital gains tax. Currently, there are amendments to the current provision of the taxable consequences of the cryptomarket that will drastically change the way businesses engage in receiving cryptocurrency as a form of payment for tax purposes. The legislation change indicated is that digital assets valued at $10,000 or more will now be treated as “cash” received for any person engaging in a trade or business. The effective date for this tax consequence will be in 2023.
Do the benefits outweigh the risk?
An important factor for small business owners deciding to allow cryptocurrency transactions rests on whether their customers or clients are in favor of making payments with cryptocurrency. If their target market prefers cryptocurrency as a form of payment, I would suggest that small businesses allow cryptocurrency to be exchanged for their goods and services. The setup of a digital wallet through a merchant service, such as Coinbase, is relatively easy, as well as affordable. If the business is looking for more immediate payment and reduction of payment processing fees, I believe engaging in crypto exchange would be very beneficial. Also, since the small business is setting up a digital wallet through a merchant, they will be able to retain cash immediately by exchanging their cryptocurrency.
However, it seems that the uncertainty of regulation and the volatility of cryptocurrency may outweigh the benefits of allowing transactions of cryptocurrency within a small business. For example, the uncertainty regarding taxation is unsettling for many small business owners. Also, many business leaders will still equate the value of cryptocurrency to its value in U.S dollars. Cryptocurrency has recently become popular, while the U.S dollar has an established, centralized method of securing transactions. Digital currencies could become a very beneficial part of everyday transactions, but business leaders will need certainty about how lawmakers and the IRS plan to regulate and tax crypto assets. It appears to be too significant of a risk for a small business to handle at the moment.