Accepting Bitcoin for Payments: The Legal Basics Part 2 of 3

Accepting Bitcoin for Payments: The Legal Basics Part 2 of 3

Cryptocurrencies like Ethereum and Bitcoin have become more well-known over the past few years. As they gain in notice, many businesses have started to consider accepting these kinds of digital currencies for payment. However, before organizations elect to do so, they may find it beneficial to understand the legal issues and other nuances of accepting cryptocurrencies instead of just government tender.

In the first part of this three-part blog series, we reviewed the basics of how most of these cryptocurrencies work and how the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has begun viewing these digital-only currencies in light of current standing laws related to money laundering and rules stemming from the Bank Secrecy Act (BSA).

In the second part of this blog series, we review how different government agencies, including other federal departments, view cryptocurrencies like Bitcoin. We will also review other considerations organizations may want to consider before deciding to accept cryptocurrencies as payment for goods and/or services rendered.

Tax considerations with cryptocurrencies

Cryptocurrencies do not fall outside the purview of tax collection in the United States. The Internal Revenue Service (IRS) has classified cryptocurrencies like Bitcoin as property. In March 2014, the IRS issued guidance that specified cryptocurrencies as property and not as foreign currency.

As a result of its classification, businesses also need to report any capital gains or losses sustained from buying or selling these kinds of digital currencies. In an article published by the American Bar Association, Stephen T. Middlebrook, co-chair of the Electronic Payments Subcommittee of the ABA Business Law Section’s Cyberspace Law Committee, spelled out some of the way the IRS classification of cryptocurrencies can affect a company’s taxes:

“[I]f a person accepts a bitcoin on Monday when the value is $400 and then makes a purchase with that same bitcoin on Friday when the value is $410, he or she has a $10 gain. Imagine a merchant that acquires bitcoin in multiple transactions over a month during which the price of bitcoin fluctuates. Its basis in each individual bitcoin may be different depending on the market price at the time of the transaction. When the merchant decides to cash out some of its bitcoin for dollars, it will need to decide not just how much bitcoin to sell but also which particular bitcoins to part with – because exchanging this bitcoin over that bitcoin will determine the amount of a reportable gain or loss.”

Cryptocurrency exchange services

Likely, any business that accepts Bitcoin or any other type of cryptocurrency for payments will want to exchange that digital currency for government-issued tender like U.S. dollars at some point. However, there are a number of considerations that organizations will have to work through in considering how to go about this.

As FinCEN’s 2017 ruling against money transmitter BTC-e highlights, companies risk running afoul of provisions from the BSA related to money laundering. To avoid working with the wrong Bitcoin Merchant Service Provider (BMSP), companies may want to clarify a BSMP’s guidelines around refunds, risk settlement, exchange rates, disclosures, fees and privacy.

Some BSMPs are registered as Money Service Businesses (MSBs), which means they are supposed to comply with rules and regulations spelled out in the BSA. A number of BSMPs are also registered with various state-level bodies created to oversee those who are buying and selling cryptocurrencies. However, the Consumer Financial Protection Bureau (CFPB) has noted that even BSMPs which are registered as MSBs may not be “trustworthy.”

Unlike banks, the vast majority BSMPs are not insured by the Federal Deposit Insurance Corporation (FDIC). If theft or amalfeasure occurs with a BMSP, its users would have very limited to no assistance from the FDIC in the matter. This is one of the many reasons why the CFPB has said that there are “a lot of big issues” with Bitcoin and other similar digital currencies.

Volatility and exchange rates

The value of cryptocurrencies is determined entirely by market demand. As such, the price of one unit can change dramatically in a relatively short amount of time. For example, during one 10-minute stretch on November 29, 2017, the price of one bitcoin decreased by $1,000.

This occasional volatility can mean that merchants may encounter difficulties navigating conversion rates. For example, if a hot dog vendor accepts one litecoin on a Monday, they could end up losing money should the exchange rate drop in the hours and day following the initial transaction.

However, in comparison to transactions and exchanges handled by banks or other similar financial institutions, BSMPs typically do not charge any fees when facilitating a transaction.

In the third and final part of this blog series, we will review additional legal considerations that organizations may want to consider, especially at the state level. We will also review some of the elements of cryptocurrencies that some businesses see as making it beneficial and help to positively differentiate it over traditional currency.

Contact us today to discuss your payments legal needs [email protected]