With an exponential gain in value and thousands of businesses now accepting it as a form of payment, Bitcoin has quickly become one of the trending topics throughout the country. While there are various types of cryptocurrency out there, Bitcoin is currently the most popular form of digital currency (also known as virtual or cryptocurrency) throughout the world and is able to be exchanged for U.S dollars, Euros, and other real currency. In addition, Bitcoin can be traded for other virtual currencies, such as Ripple or Ethereum currency.
Whether people use cryptocurrencies to pay for products and services or strictly for investment purposes, they may not be aware that they have a possible taxable impact.
If your business is considering or is already accepting cryptocurrency as a payment method from customers or clients, your taxes may be slightly more complicated this year, but you are not alone. In this article, we are going to review cryptocurrency and taxes, as well as what to if you are a business owner accepting cryptocurrency as payment.
Currently, multinational companies such as Amazon, Microsoft, Overstock.com, and other notable brands on this list accept Bitcoin, the most widely used cryptocurrency. These large use cases have prompted many smaller businesses to follow suit. Still, it’s important to understand how cryptocurrency can positively or negatively affect your business before you make a decision.
Do You Have To Pay Cryptocurrency Taxes?
All revenue earned from cryptocurrency has to be treated like a cash transaction. This process is simplified by the fact that most merchant wallets automatically convert cryptocurrency to cash. So, when you receive ACH payments from your wallet account, you can simply categorize the transactions as revenue and include it in your gross revenue numbers. All cryptocurrency sales are taxed at the normal corporate tax rate of your corporate structure.
However, if you fail to convert your cryptocurrency immediately to cash, your taxes become a bit more convoluted. Cryptocurrency is considered property by the government, and any gains in the value of your cryptocurrency is taxed as capital gains
What Happens If You Do Not Report Cryptocurrency Capital Gains?
While crypto transactions can be complex, the IRS and government fully expect us to comply with the set tax guidelines for cryptocurrency. Failing to do so can lead to further complications and issues.
Purposefully hiding profits and failing to report capital gains can enable the IRS to enforce numerous penalties, such as criminal prosecution, which is generally used in more extreme cases that involve larger profits and capital gains. Those that commit this tax fraud can potentially face up to five years in prison.
In addition, there is generally a fine up to $250,000. For more details on steps to take if you currently are not tax compliant can be found in this article
Integrate Transactions with Your Accounting Software
The last step when accepting cryptocurrency as a form of customer payment is to integrate or import and track your cryptocurrency transactions using your accounting software. Leading accounting software providers like QuickBooks or Xero have their own integrations. If you don’t use either of these, your merchant wallet typically provides documentation on how to manually import your transactions.
When a business accepts bitcoins for payment, there generally is the need to convert them to the currencies used for paying suppliers, employees and shareholders. Some merchants set prices based on the current market rate at the time the price quote is presented to the customer
When prices are determined using an automated process, the current market rate can be based on either a current price or on a weighted average basis.
When cryptocurrency funds for purchases are received, some merchants instantly exchange those proceeds into the preferred currency used. Hedging for each transaction can nearly eliminate exchange rate risk that the business is exposed to when accepting bitcoins for payment
You should also consider the possible risk that fraudsters could send counterfeit invoices to your customers to entice them to make a payment to an address they control, instead of you. While that isn’t likely it depends on how well a fraudster could find out who your customers. One way to avoid this is to never let people try to type an addresses off payment stubs – instead, force people to get the full Bitcoin address from your website via secure SSL. You can print a portion of the address on the payment stub so that the customer’s need for a paper trail can be satisfied, so they can prove they paid if there is ever a dispute.