If you’re considering accepting cryptocurrency, here are some benefits and disadvantages to offering this payment option.
Why some small businesses are starting to accept cryptocurrency
Despite shifting regulations and negative press, cryptocurrency has started to enter mainstream retail. Research from the nonprofit National Cryptocurrency Association shows that nearly four out of 10 (39%) of merchants already accept cryptocurrency at checkout. Nearly 85% of merchants believe crypto payments will become common within the next five years.
The primary reason why some small businesses are starting to accept crypto is customer demand. In the National Cryptocurrency Association study, 88% of merchants say they’ve been asked by customers if they will accept crypto payments. More than two-thirds say customers want to use crypto at least once a month. Other reasons for accepting this form of payment include:
- Faster transactions.
- Attract new customers.
- Improved security.
- Greater privacy.
However, those last two points—improved security and greater privacy—come with some caveats.
Cryptocurrency introduces different security issues
Credit card fraud is on the rise; Experian reported that about 60% of credit card holders experienced attempted fraud in 2023. And, unfortunately, small businesses are often the target of payment fraud and data breaches. Many people laud cryptocurrency as more secure.
Unlike credit card payments, data isn’t stored in a centralized hub where data breaches commonly occur. Instead, their information is stored in a crypto wallet. The blockchain general ledger is used to verify and record every transaction, making it very difficult, if not impossible, to steal someone’s identity.
However, the anonymity that cryptocurrency was initially known for may be slowly changing. Eswar Prasad, Economics Professor at Cornell University and Author of "The Future of Money: How the Digital Revolution is Transforming Currencies and Finance," told Yahoo Finance that bitcoin is becoming more centralized as it becomes more mainstream. “Anonymity is no longer the big selling point of these digital currencies anymore,” he said. Whether this shift will impact consumer adoption remains to be seen.
[Read more: What Small Businesses Need to Know About Blockchain]
Cryptocurrency transactions are irreversible
Once a cryptocurrency payment goes through, it is permanent. This can be a double-edged sword for small businesses. “Transactions can be refunded only by the party receiving the funds. Businesses that accept Bitcoin should be prepared for the possibility of customers requesting refunds, and keep track of how much money each customer has paid,” wrote Inc.
On one hand, cryptocurrency’s irreversibility helps business owners better manage their cash flow. There are no chargebacks to worry about, and if someone requires a refund, the retailer has to manually pay them back. This forces your team to keep immaculate records.
However, this process can also create inefficiency in your business operations and additional work for your employees. If you have a ton of refunds during the holiday season, for instance, your team will need to divert time and attention toward returning payments individually.
The IRS considers cryptocurrency to be “property” for tax purposes, not currency. This puts crypto in the same broad category as stocks, bonds, or real estate, rather than cash.
Bitcoin can lead to lower transaction fees
Merchants are responsible for paying transaction fees, as well as setup fees for many payment processors. PayPal, for instance, charges close to 4% per transaction (and sometimes more). Cryptocurrencies charge much lower fees, if any. Some bitcoin exchanges offer fees under 1%.
Likewise, if your business serves customers overseas, cryptocurrencies can help avoid international currency payment fees. Cryptocurrencies aren’t tied to a country of origin or a national bank. As a result, businesses don’t wait for payments to clear at a foreign bank or pay the costs.
[Read more: How to Accept Bitcoin Payments]
There are tax implications
The IRS considers cryptocurrency to be “property” for tax purposes, not currency. This puts crypto in the same broad category as stocks, bonds, or real estate, rather than cash.
In practice, the general tax principles that apply to property transactions apply to transactions using virtual currency. When you dispose of crypto, you recognize a capital gain or loss—the difference between what you paid (your basis) and the value at disposition. You must keep track of the value of each cryptocurrency on the day it was received and the day it was sold. This can quickly get complicated, especially when managing several transactions daily.
Not every cryptocurrency sale is a taxable event. Taxes apply when there is a disposition, not simply when assets move between wallets or accounts. The IRS states that if you transfer digital assets from a wallet, address, or account belonging to you, to another wallet, address, or account that also belongs to you, then the transfer is a non-taxable event (aside from any fees paid in crypto to effect it).
How to mitigate risks when adopting cryptocurrency payments
If you decide to move forward and offer crypto as a way to pay at your establishment, take precautions to mitigate risk for your company and customers.
Make sure you use a reputable payment processor with built-in security features like two-factor authentication and encryption. Some experts recommend converting crypto to cash quickly: A merchant service like BitPay or Coinbase can be used to immediately exchange digital currency for cash, reducing exposure to price volatility. And you should monitor your transactions to help ensure you detect suspicious activities promptly.
In addition, regular training and education can help employees prevent unauthorized access or identity theft attempts. Keep everyone up to date on cryptocurrency regulations and threats. Maintain detailed transaction records to manage refunds and comply with tax regulations.
When you’re just starting out, you may want to consider accepting cryptocurrency only for transactions above a certain value to minimize risks for smaller purchases. Likewise, only accept multiple established cryptocurrencies to spread risk and appeal to a broader customer base. Over time, you can expand your crypto acceptance to meet demand.
[Read more: How to Collect Payments: A Guide to Every Form of Payment]
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