Should I Accept Cryptocurrency in my eCommerce Store?

Should Businesses Accept Cryptocurrency in Ecommerce Store?
January 31, 2022

Key Takeaways:

  • Cryptocurrencies have been around since 2009 and have been adopted as a form of payment by thousands of businesses across the United States.
  • Cryptocurrency investing is still very risky and should be treated with caution, even if only using it as a form of payment.
  • Online merchants can easily accept credit cards, but accepting cryptocurrency in your eCommerce store still requires some technical skill.
  • Accepting cryptocurrency can complicate record keeping and comes with a host of tax nuances.
  • Business strategy will likely be the key driver of a business’s willingness to adopt cryptocurrency as a form of payment.

After Diners Club came out with the first multi-purpose charge card in the 1950’s, it was still several decades before credit cards were accepted widely by merchants across the United States. After 60 years of swiping plastic, many businesses today reject cash because it’s inconvenient and poses risks. 

With the emergence of Bitcoin, the world’s first cryptocurrency, in 2009, a new form of payment is now quickly gaining traction. In the 12 years since Bitcoin’s debut, thousands of new digital currencies have been created and the market capitalization for all cryptocurrencies is valued at $1.6T as of the publishing of this article.

While payment technology will continue to evolve, cryptocurrency is likely here to stay. But does that mean you should accept cryptocurrency in your eCommerce store – or in your business at all? The answer has less to do with what I, or any other technologist, think about the future of decentralized finance and has more to do with whether your business is prepared to take crypto as payment in the first place.

I would challenge you to ask yourself a different question: How prepared is my business to accept cryptocurrency?

Today, merchants pay around 3% to accept credit cards as a form of payment. However, businesses large and small are seeing increased processing fees as more credit cards come with expensive consumer rewards and as the cost of risk prevention continually rises with the ongoing evolution of the Internet. As the convenience of online ordering flourishes, merchants are increasingly motivated to accept online payment for orders and invoices, which means they are spending more and more of their revenue on credit card processing fees.

What exactly are merchant processors giving businesses for that 3%? If a trustless payment system existed that enabled us to transfer funds instantly without an intermediary, how much less could merchants expect to pay? Could we expect it to be any faster or more secure? 

Cryptocurrency offers a compelling solution, but can your business withstand the risk associated with the largely unregulated technology?

Cryptocurrency Investing Is Still a Very Risky Game

According to Pew Research, nine out of ten Americans report having heard about cryptocurrency, but only 16% of the United States population, or about 53 million Americans, have ever owned any. If you believe crypto isn’t going anywhere, these statistics suggest that we are in the very early stage of the adoption curve. This could create a significant opportunity for anyone who chooses to hold some amount of the right cryptocurrencies, but ownership of even mainstream cryptocurrencies will send portfolios up and down on a daily basis – some days to the tune of tens of percentage points. 

If you’re in a business that needs access to the capital you earn in the short term, keeping any amount of money in crypto is risky. If you buy into the notion that crypto will truly become mainstream, the question remains, which cryptocurrencies will become viable payment solutions?

Without an available, up-to-date, or remotely accurate count, it’s safe to say thousands of businesses are already accepting crypto as payment. According to Fundera, 2,300 US businesses were accepting Bitcoin as a form of payment at the end of 2020. More data are becoming available and soon we’ll have a better idea of how many businesses accept other cryptocurrencies, but Bitcoin isn’t the only game in town, and it’s arguably a better store of value than it is a form of currency (think gold). In comparison to other cryptocurrencies, Bitcoin has higher transaction fees, slower speed, and in some cases, higher volatility.

With that in mind, businesses may need to look to alternative currencies like Litecoin, Bitcoin Cash, Ripple, or Dogecoin to conduct payment transactions. Stable coins, cryptocurrencies that are pegged to the US Dollar, may also become an option. Making the choice as to which ones to accept will take careful consideration, however, as each coin has its downfalls.

Technical Requirements May Be Prohibitive for Some

Another challenge that businesses will face is the technical requirements to own and transact in the various cryptocurrencies they intend to accept. Currently available infrastructure for businesses to accept cryptocurrencies leaves much to be desired. Most of what already exists often involve an intermediary who takes a percentage of the transaction – not much different from credit cards, right? But those fees are often less than merchant processing fees, which is a step in the right direction. Of course, you can conduct manual transactions with wallet-to-wallet transfers, but that begins to erode the convenience of online transactions and the time required to process these transactions comes with its own costs.

In all cases, a crypto wallet or multiple wallets will be required in order to store accumulated currencies. You’ll also need a crypto payment processor that integrates with your website technology in order to settle transactions. Competitive and reliable solutions from Bitpay and Coinbase Commerce will cost 1% and options exist to automatically convert transactions into your fiat currency of choice if that is what your strategy calls for.

Trustless Payments Don’t Equal Trustless Transactions

The benefit of a trustless payment system, which is what cryptocurrencies offer, is that you create a digital money trail that is fully decentralized (stored widely on nodes across the web) and accessible to anyone with access to the Internet. This way, you can always prove a transaction between two wallets occurred, and with other advancements like smart contracts, more complex transactions can be conducted in a systematic and verifiable manner.

There is a lot of potential for decentralized financial tools, but crypto only solves for one end of the value exchange. The payment is trustless, but you still have to convince your customer to trust you to deliver on your promises. In other words, you can accept cryptocurrency today, but it may take some time and development of the technology before most of your customers trust it enough to pay you with it.

Taxes Get More Comlicated When You Accept Cryptocurrency

Since just about everything that involves an exchange of value is a potentially taxable event, I consulted my trusted accountants at Whittlesey, a prominent New England accounting firm that we began working with when we started Xponent21 in 2015. We don’t do anything involving money moves or taxes without first consulting with our advisors (and you shouldn’t either).

I wanted to know what sorts of records needed to be kept in order to report income to the IRS and I also wanted to know what events would be taxable so that those reading this could start to assemble their crypto strategy. While it ended up having little impact on the answers, we presented several questions framed through the lens of a fictional company called Snazzy T’s Casual Shirt Store, a pass-through entity (LLC or S-corporation) selling t-shirts online.

My first question was about what the tax ramifications are when a transaction occurs. Michael Lemieux, my longtime tax manager at Whittlesey, said, “Well, it’s going to be income to you, first of all, and you will have to convert it for tax purposes.” He clarified that “You don’t have to convert the currency itself, but you have to translate it into US Dollars for your books and records.” Michael Pyne, a partner at Whittlesey added, “So basically whatever that cryptocurrency that you received, you have to convert it into the fair market value or what is it worth in dollars and that’s your revenue.” 

So, the transaction itself is your first taxable event (like all sales transactions) and if you actually convert the cryptocurrency you receive into US Dollars at the time of the transaction, it will be your only taxable event with regard to that payment.

Next, I wanted to know what other scenarios might trigger a taxable event. Michael Pyne shared that, “whenever you actually convert it to dollars or use it to buy other goods and services, at that point in time, you’ll have to recognize the gain or loss on the change.” Put simply, there are two more events that could affect your tax liability – a currency conversion that occurs sometime after the original transaction or if you were to use that crypto to purchase goods or services from another merchant. (A subsequent refund to a customer in held crypto assets will also trigger a taxable event, for that reason – a likely reason Tesla doesn’t offer refunds on Dogecoin transactions.)

This is where it gets interesting: if the value of your crypto has gone up, you’ll incur a tax liability on the gain. If the value of your crypto has gone down, you’ll be able to offset your taxable income by claiming a loss. 

I asked, “Let’s say Snazzy T’s receives $10,000 in Bitcoin for an order and when they go to sell that Bitcoin, it’s halved in value, they are also taking a capital loss?” Both Michaels responded at the same time with a “yes” with Michael Lemieux adding, “It’s a realized capital loss.” Michael Pyne clarified, “whether it’s a short-term or long-term capital loss will depend on how long you had the currency.”

With anything related to taxes and the IRS, things tend to be more complicated when you factor in your individual situation. For more information on tax implications, visit the IRS’s FAQ page dedicated to virtual currency transactions.

Business Strategy Should Drive Your Cryptocurrency Decisions

Every decision you make in business would ideally be informed by your business strategy. What steps will you take to appeal to buyers in the market place and how will you make money from your operations? In a complex world that is changing fast, you may not have thought much about developing a cryptocurrency strategy, but now isn’t a bad time to start.

In 2021 Tesla decided to make an investment in Bitcoin and briefly began accepting it as payment for their cars before reversing their decision. CEO Elon Musk cited the environmental impact of mining Bitcoin as the reason for discontinuing its acceptance but indicated they would accept it again should things improve.

In the middle of 2021, and with the help of The Martin Agency, Axe made a limited edition Doge-scented body spray and spun up a website where fans could claim their can. Another billionaire is a fan too. Mark Cuban, the owner of the Dallas Mavericks, began accepting Dogecoin for tickets and concessions at games as a vote of confidence.

Coins like Doge, which was created as a joke in 2017 but has risen to become one of the top 10 cryptocurrencies by market capitalization, have a loyal and growing fanbase that companies are eager to tap into.

Other coins exist that allow you to stake your holdings and lend them out to others, earning interest on your portfolio. The reality for many business owners is that it’s complicated and there may not be enough time in the day to develop a solid cryptocurrency strategy until there is more clarity in the marketplace and more consumers demand the ability to pay with crypto that they hold.

Whether you are ready to take the plunge or if you still have more research to do, it’s clear that cryptocurrencies aren’t going away anytime soon. We may have decades of development still in the technology before something else tries to replace it. It’s my prediction that crypto will continue to become more mainstream and will eventually replace traditional currencies. Regulation is likely to come soon and that may provide the comfort business owners seek before taking any risks in the space. Delaying your decision to stick a toe in the water may not be a bad idea, but with other businesses actively accepting crypto, it’s best to keep an ear tuned for any developments.

Will Melton
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Money illustrations by Storyset.

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