With the Bitcoin price in the Headlines daily and make Tesla very public big investments When it comes to cryptocurrencies, CFOs may wonder whether there is an opportunity for their organization here.
While it is certainly not for everyone, there are certain circumstances in which limited engagement with cryptocurrency can make sense for traditional businesses. It is important to proceed with caution for tax and business reasons.
Accepting cryptocurrency from customers
For businesses targeting young, wealthy customers with goods like jewelry, automobiles, and high-end electronics, accepting cryptocurrencies for payment can be a smart move. The hundreds or even thousands of new ones Crypto millionaires that are created every day during price hikes can make a difference when you don’t have to convert to traditional currency to make a larger purchase.
Payment service providers who specialize in cryptocurrencies function much like credit card processing companies and can enable companies to accept Bitcoin and other digital currencies for payment without having to hold them in a digital wallet. This eliminates the risk of market volatility and greatly simplifies bookkeeping.
In addition, the processing fees charged by cryptocurrency payment service providers are often quite low, typically 1%. This is significantly lower than the rates for credit card processing and just as easy to use once set up.
Using cryptocurrencies for payments
One of the main use cases for cryptocurrencies is that they are not subject to overseas transaction fees. Businesses with suppliers and vendors around the world who accept Bitcoin for payment can see savings by paying their bills in digital currency. However, this does not ease reporting requirements and likely means that the company will have to hold some cryptocurrencies on hand, which poses security and financial risks.
While banks can reverse fraudulent transactions, there is no other legal recourse than the legal system when cryptocurrencies are stolen. It is important to manage exactly who has access to the company’s digital assets because if they are stolen they will not be recovered. This is also why cybersecurity measures to protect your accounts from hackers are paramount. Even the hackers who extorted millions in the Colonial Pipeline cyberattack were unable to keep their bitcoin passwords secure enough to prevent investigators from taking back much of the funds.
Hold cryptocurrency as an investment
Let’s face it – you are not an Elon Musk. For most companies, buying cryptocurrency as an investment would be a bold move into uncharted territory.
Bitcoin recently lost 50% of its value in a week after gaining nearly 2,000% in a year. The volatility fluctuates in both directions and is risky from the perspective of the Treasury. Since you are not paying rent or employees in Bitcoin, a positive token flow and negative cash flow can easily occur during a market correction.
In addition, generally accepted accounting principles (GAAP) treat digital currencies as intangible assets that are subject to impairment. Since intangible assets are excluded from increasing, from an accounting perspective, Bitcoin is essentially an asset that can decrease in value but not increase.
If your company has always wanted to own volatile assets, they were always available. Does your company have heavily leveraged options? If not, it probably shouldn’t own Bitcoin either.
Tax Considerations
The IRS placed increased control on cryptocurrency transactions. So if your company deals directly with cryptocurrencies, it is important to carefully monitor them for tax reasons. To be honest, I’ve never seen a company do this perfectly.
You need to track the US dollar movement from the day you received the cryptocurrency to the date of the sale and apply a basis for each of your sales. There is software out there that can manage this, which is a must if you have more than a few transactions.
It may seem easy to scale to thousands of transactions, but it isn’t. Exchanging one cryptocurrency for another complicates matters even further. Each transaction is treated as a sale and purchase – and therefore a gain or loss – rather than an even exchange.
With crypto prices making headlines over the past year, it’s easy to feel like you’ve missed the boat. I think we are still in the infancy of the new paradigm of digital assets. CFOs who are even considering adding their company to cryptocurrency are ahead of the game. If you can find a way to do it that makes sense, that’s great. But there is no rush.
Justin Wilcox is a partner at the accounting and advisory firm Connecticut FML where he heads the company’s cryptocurrency practice.
Bitcoin, Contributor, Cryptocurrency, Gaap, Investments, Payments
source https://thedailytradingnews.com/why-cryptocurrency-transactions-matter-cfo/
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