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Small Businesses and Cryptocurrency Laws

Cryptocurrencies are known for their volatility. As interest in digital currencies continues to rise significantly, can digital payments successfully be adopted by small businesses?

The decentralized digital assets known as cryptocurrencies are designed to offer secure transfers through their blockchain technology. Additionally, no middleman is required to transfer digital currencies from a buyer to a seller.

Fraudulent transactions are very difficult because blockchain technology allows every user access to complete and verified records of their transactions. Most importantly, cryptocurrencies offer faster payments and lower transaction fees, make it easier for small businesses to use crypto for transactions. As cryptocurrency laws change, the benefits using of cryptocurrency may be shadowed by some downsides.

Legal implications of dealing with cryptocurrencies

Up until now, the Securities and Exchange Commission (SEC) continues to regulate cryptocurrencies. These are regulated as securities by U.S. law, posing some problems when they are used in transactions. This could all change with the proposed bill, known as the Cryptocurrency Act 2020.

The bill was completed and introduced in March by Paul Gosar, the Republican lawmaker from Arizona. Earlier this year Gosar specified: “By providing much-needed regulatory clarity about cryptocurrency, we will make it easier for businesses, institutions, and everyday Americans to participate in this growing industry.” The bill divides digital assets into 3 categories that will each fall under the sole authority of a different regulatory agency.

Other efforts by lawmakers include the elimination of tax liabilities for the transfer of cryptocurrencies by merchants, something which their current classification as trade securities does not allow. The bill is known as the Token Taxonomy Act and was first introduced to Congress last year but never made it to the vote. A slightly different version was reintroduced by Republican representative Warren Davidson this year.

As the situation currently stands, small businesses would be unable to keep up with the accounting demands for the transfer or cryptocurrencies as payments.

Cryptocurrency taxation

Taxation of cryptocurrencies in transactions remains vague. Any amount received as payment for an issued invoice is considered as revenue and income taxes are paid on the revenue. But, if the cryptocurrency used to pay for the transaction increases in value, the capital gains are also taxed, but at an adjusted cost-base.

This will require diligent record-keeping and accounting of all transactions to prevent unintentional crypto tax avoidance, something the IRS plans to crack down on.

Benefits and risks of accepting cryptocurrencies in small business transactions

The benefits of using cryptocurrencies are as numerous for small businesses as they are for larger enterprises. The payments are made directly between the buyer and seller resulting in eliminated or reduced fees in the absence of a bank or payment processor. Bank and credit card fees are expensive, whereas typically cryptocurrency transactions cost less than 1%.

Another advantage is once the payment is made, it cannot be reversed. This eliminates the merchant from carrying all the risk and saves businesses from losses of chargebacks on disputed transactions. Cryptocurrency transactions offer sellers the same security as cash transactions.

The most significant risk of accepting cryptocurrencies as payment is their price volatility. If the business does not immediately convert the digital money to dollars, they take the risk of the price falling. If that happens, the merchant will lose money on that particular transaction.

Another consideration for a business is it may be accepting cryptocurrencies in payment, but may not be able to pay off its various monthly expenses, e.g. rental, utilities, etc., in digital currencies.

Millennials prefer investments in bitcoin to gold when looking for a safe-haven. It appears they are influencing how Generation Xers and Baby Boomers, who hold more money, are viewing digital currencies. As everyone becomes more familiar with cryptocurrencies, widespread adoption may not be that far off.