Can I Use Cryptocurrency in My Business? Yes, But Proceed With Caution. A Lot of Caution.

Update: May 19, 2021 is seeing cryptocurrency values plummet, reacting to China banning financial and payment institutions from using cryptocurrencies. While individuals are not currently prohibited from holding crypto, China has effectively decimated crypto’s utility in the country. China has also officially warned investors against speculation. As of the time of this writing, Bitcoin value is down over 30% with other cryptocurrencies similarly disrupted. May 19th illustrates precisely why cryptocurrency – while an exciting technology with a lot of potential – is not a good replacement for traditional fiat currencies in day-to-day business.

Crypto is big news. Elon Musk’s Telsa, Inc. (TSLA) made news in early 2021 when it announced that it had invested $1.5 billion in Bitcoin and had plans to accept Bitcoin as payment for its vehicles in the near future. Tesla’s endorsement was a show of confidence in cryptocurrency that immediately boosted the market and added legitimacy to the emergent technology. However, on May 12, 2021, Tesla backtracked, announcing that it was no longer accepting Bitcoin due to concern about the electricity-hungry technology’s environmental impact. Predictably, the price of Bitcoin fell over 10% and took down many other cryptocurrencies or “altcoins” with it. China’s cryptocurrency ban on May 19th sent markets plunging further. United States federal regulators have also expressed skepticism about cryptocurrency, especially its price volatility and penchant for speculation. Treasury Secretary Janet Yellen (former Chair of the Federal Reserve) stated that a regulatory framework for cryptocurrency is being developed in the Biden administration. While Secretary Yellen expressed support for a digital dollar, she considers Bitcoin “extremely inefficient.”

Nevertheless, cryptocurrency is here to stay and it is (and will continue to be) a significant part of the global economy. As a business owner, you may be considering whether (and how) to integrate cryptocurrency into your business operations. Especially if you are in the technology sector, you may be interested in this decentralized exchange medium – whether to diversify your balance sheet or even integrate crypto as a payment option for your customers. Used the right way, there are certainly applications for cryptocurrency as part of your business. But it is anything but simple and using it requires hands-on attention from your legal and financial (including tax) advisors.

If you are considering using cryptocurrency, you should learn about it and not make assumptions. You may want to spend time learning the exact technology, but at a minimum you must understand that despite its name, “cryptocurrency” is not actually currency like dollars or euros. The best analogy is that it is an intangible asset, like stocks or bonds. In fact, that is exactly how the IRS treats it. This means you will have an interesting tax situation at year end – you will pay income tax when you acquire cryptocurrency (for example in exchange for goods and services) and then you also pay capital gains tax if you exchange the cryptocurrency for U.S. Dollars at a profit. Or, if the cryptocurrency loses value, you will not be paying capital gains tax, but essentially taking a loss due to volatility. Exchanging one cryptocurrency into another also has tax implications. The IRS has an informative FAQ about the tax treatment of common crypto transactions here. Obviously, when you take dollars for goods or services, the tax situation is much simpler.

Extreme volatility is inherent to cryptocurrency and poses a real challenge to any business considering its merits. In the past year, Bitcoin’s dollar exchange value increased from about $9,700 to $56,500, or more than $550%. Elon Musk’s tweet on May 12, 2021, instantly dropped Bitcoin’s exchange value to below $50,000. China’s ban has it trading below $35,000. This is obviously problematic, as the value of traditional currency does not fluctuate like this, and in fact, currency stability is a goal of a healthy economy. Such fluctuations in value do not make for a good transaction medium. If you sell $100,000 worth of goods for $100,000 worth of Bitcoin and overnight Bitcoin loses 10% of its value (because of a tweet), your business just took a $10,000 loss for nothing more than choosing Bitcoin as a medium of exchange. Obviously if you sell $100,000 worth of goods for dollars, you will still have $100,000 the next day and even next month and next year (slight inflation notwithstanding.) In that sense, it is exactly like using stocks as an exchange medium. Stablecoins offer one potential solution, as they are alternative “coins” tied directly to fiat currencies (like 1 to 1 with the U.S. Dollar) or other physical world assets, but they are not as mainstream and still carry the complex tax treatment.

What about wages? Can you pay wages directly in cryptocurrency? The Fair Labor Standards Act requires that wages are paid in cash or negotiable instrument payable at par (check). State laws also require payment of wages in U.S. currency. This means that you would have to convert Bitcoin to make basic payroll. However, it is possible to make discretionary bonus payments in cryptocurrency – but remember that the fair market value of the cryptocurrency at the time of payment must be reported on the W-2 and also requires the payment of payroll taxes. This can be administratively inefficient. You may also face liability if you fail to provide the appropriate disclaimers and disclosures to cryptocurrency recipients about volatility and tax implications.

Given all these pitfalls, why bother? While there are many risks and uncertainties, it might make sense to have your business be at least “crypto friendly” and educated about the new technology. First, it may be good marketing and branding to position your startup business as “high-tech,” innovative, and tech-friendly with cryptocurrency. Two, if you do a lot of business overseas, cryptocurrency is a great way to quickly and cheaply exchange money. There are no transaction fees or delays, both of which can be significant for international transactions. Three, the decentralized nature of cryptocurrency (meaning it is outside the fiscal policy of any central bank) make the currency less prone to inflation or government manipulation.

Additionally, more private businesses are trying to support cryptocurrency. WeWork announced that it would accept Bitcoin and some other major cryptocurrencies for membership fees, hold crypto on its balance sheet, and work with landlords and other partners to make payments in cryptocurrency more available. PayPal and its Venmo peer-to-peer payment services also indicated support for cryptocurrency transactions as well. The State of Ohio even had a short-lived pilot program to accept tax payments in cryptocurrency.

What does this all mean for businesses in general? To borrow the words (but not the title) of Mastercard’s Executive Vice President for Blockchain and Digital Asset Products:

“Our philosophy on cryptocurrencies is straightforward: It’s about choice. [We aren’t] here to recommend you start using cryptocurrencies. But we are here to enable customers, merchants and businesses to move digital value.”

The bottom line is if you choose to proceed, proceed with caution. A lot of caution.

Thinking about integrating cryptocurrencies into your business? Contact Dan Artaev by email or call or text to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, investment, or tax advice. Every situation is different and faces its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2021 Artaev at Law PLLC. All rights reserved.

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