October 8, 2018

MBAF's Erick Wendelken discusses how the rise of cryptocurrencies could affect South Florida businesses with the Daily Business Review.

As a major hub for international business, South Florida is becoming ground zero for the cryptocurrency revolution. In fact, Miami hosted the 2018 North American Bitcoin Conference— the fifth and most attended installment of the conference—and is slated to host the 2019 show.

The appealing aspect of cryptocurrencies is the ability to facilitate international transactions where a business relies heavily on international clientele and investors. Using cryptocurrency for major international transactions can bypass the typical intermediaries such as correspondent banks, yet, still provide “real-time” transaction settlements similar to the real-time gross settlement system (RTGS).

Cryptocurrencies: Should I or Shouldn’t I?

There could be several advantages to using a cryptocurrency. For example, transacting business only in bitcoin means you would no longer have to manage multiple currency accounts. All that you would need is a single bitcoin wallet. The payments are very fast, and competitive with the speed of the RTGS system, and they are secure and confidential. In addition, crypto transactions have a reduced credit risk, since the funds must be available in the bitcoin wallet at the time of payment.

Cryptocurrencies can also streamline and simplify foreign exchange management, and can be ideal if you are doing business with countries experiencing currency volatility, since holding currency in a universal settlement currency may protect you from sudden severe drops in the value of local currency.

Perhaps the best way to decide if you want to use them, is by examining how cryptocurrency might impact your business’ bottom line. Following is a closer look at some key areas where digital currencies offer potential benefits and risks.

Reduced Transaction Fees

Generally speaking, cryptocurrencies have no direct processing fees. Unlike with credit card transactions, cryptocurrencies are decentralized, which means that transactions have no third-party involvement. Coins and tokens are not developed or controlled by a single authority like fiat money that is issued by a sovereign government, but instead work directly through blockchain technology. If you are a merchant selling online, you will, however, likely be charged a small flat fee for your merchant wallet account or accounts like BitPay or CoinPayments, which allow you to accept certain cryptocurrencies.

Faster Payment

Cryptocurrency transactions happen almost immediately, unlike credit card payments that may take days to clear. Sales are also final, which means that charges cannot be negated after the fact. All of this translates into more financial security for your business.

Improved Customer Access

Ultimately, by simply accepting cryptocurrency payments, you may boost your bottom line as you attract new customers. Acceptance of crypto can help your expand globally as described above, and can also help you to attract new clients domestically.

Volatility in Value

Cryptocurrencies are notoriously volatile, which makes them attractive to investors, but also potentially dangerous for businesses that accept them as payment. However, for many merchants, the volatility issue is muted by the fact that merchant wallet accounts offer immediate conversion to fiat money. Unless a crash occurs within seconds after a payment is made and accepted, most companies are protected from volatility. For this reason, most do in fact choose to automatically convert payments to fiat. If you choose not convert, you are essentially taking the risk that comes with coin investment.

Lack of Regulation

Cryptocurrency is still relatively new, and as a result, governments around the world have issued limited and differing regulations. Some nations, have aggressively moved to embrace and promote cryptocurrency. But overall, a general lack of regulations, including here in the United States, can mean uncertainty for businesses that deal in cryptocurrency, including uncertainty about what kinds of taxes and investment limitations may be imposed in the future.

Reuters recently reported that the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) is “aggressively” pursuing virtual currency platforms that lack strong internal safeguards against money laundering.

Taxation and Accounting Challenges

In 2014, the IRS released IRS Notice 2014-21, which declared that for U.S. income tax purposes, a cryptocurrency is property and not a currency. Depending on the facts, that means the character of the cryptocurrency could be business property, investment property, or other property. Therefore, the general U.S. tax principles that apply to any property transaction should be applied to exchanges of cryptocurrencies. Cryptocurrencies held for investment and sold for a gain are subject to short-term or long-term capital gains tax. Conversely, those investment-held cryptocurrencies sold for a loss are able to utilize a capital loss.

The IRS notice does not, however, resolve all issues related to reporting requirements or taxation. Some of the unresolved issues include foreign account reporting, and taxation of crypto-forks.

Of course, you should not make any decision regarding the use of cryptocurrencies, based solely on the information in an article like this one. To understand all of the implications of using, accepting or investing in cryptocurrency, you would be well-advised to start by talking to your financial and tax advisers today.

Erick Wendelken is a principal in the tax and accounting department at MBAF in Miami.

Click here to read the article on Daily Business Review.