On Wednesday, experts testifying at the House Small Business Committee’s first-ever hearing on the digital payment method debated the IRS definition -- and the pros and cons of its usage for small businesses. Last week, the IRS announced it would treat the digital currency Bitcoin as a property, rather than currency, for tax purposes.
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Here’s the good and the bad of Bitcoin when it comes to your business, according to the testimony on the Hill.
Pros of Bitcoin for Small Businesses
It cuts back on transaction fees.
“Small businesses accepting credit card payments often face fees of around 25 cents for each card swipe, plus two to four percent of the transaction total. If you are a small-margin business, those fees can really eat into your bottom line,” said Jerry Brito, a senior research fellow at the Mercatus Center at George Mason University. In comparison, Brito said merchant processors for Bitcoin such as BitPay or Coinbase charge fees of one percent or less.
“If you are a small-margin business, that difference could mean doubling your profits,” said Brito.
All transactions are final.
“[B]ecause there is no central intermediary, there is no third party that can reverse a transaction. This protects small businesses from chargeback fraud, which often results not just in the loss of the sale, but also in penalty fees,” said Brito.
Bitcoin provides greater privacy – and could cut back on fraud.
“Bitcoin enables individuals to push payments to merchants without having to share personally identifiable information that can be intercepted by criminals and used for fraudulent purposes,” said Adam White, director of business development and sales at Coinbase, a Bitcoin merchant processor. White said Bitcoin serves more than 1 million customers and 28,000 small businesses.
Bitcoin could encourage international growth for SMBs.
“Many products and services are not available for sale in foreign countries solely because the business cannot manage the payments systems needed to support overseas commerce,” said White.
“Because of the borderless and global nature of Bitcoin, a Bitcoin payment made by customers in New York looks identical to a merchant as a Bitcoin payment made by a customer in London, Buenos Aires or Tokyo.”
Early adopters could gain small businesses attention.
“Bitcoin has gained increased media attention. As a result, more small businesses view accepting Bitcoin as a way to gain market exposure. Posting a sign on a door front, on a website or gaining local media coverage increases free advertising and brand awareness. For example, Grass Hill Alpacas, a Massachusetts lama farm and purveyor of wool socks, has gained considerable visibility being an early acceptor of Bitcoin,” testified Mark Williams, a banking specialist and commodities and risk management expert in the Finance Department of Boston University.
Cons of Bitcoin for Small Businesses
Bitcoin is extremely volatile.
“The price risk associated with Bitcoin is extreme and unlike any other volatile commodity. Despite the dramatic rise in 2013, prices have not been a one-way space rocket to the moon. Since November 2013, Bitcoin has slid by over 60 percent to $462,” said Williams. He added that Bitcoin is seven times riskier than gold, and eight times riskier than the S&P 500.
The IRS’ ruling can mean tax risks for small businesses.
Because the IRS decided that Bitcoin is property, it can be subject to capital gains taxes.
“On March 25, 2014, IRS issued a ruling that clarified the tax treatment of Bitcoin but, in doing so, created greater uncertainty about the e-coin’s future. Bitcoin is now taxed as property and not as foreign currency. Any gains in Bitcoin value is taxed as ordinary income (as high as 39.6%) or at the capital gains (20%) tax rate,” said Williams.
E-Wallets can be stolen.
Williams said that third-party vendors that create “e-wallets” for storing Bitcoin aren’t subject to regulatory oversight – and don’t provide protection for consumers in the case of loss or theft.
“This is particularly important given that Bitcoin is an anonymous currency that is irreversible once transferred. Bitcoin features make it an ideal target for cyber criminals. If an e-wallet is hacked and coins stolen or transferred by mistake, they are lost forever,” said Williams.
Bitcoin exchange failures pose risks.
“In the past, many Bitcoin exchanges have failed. If a small business chooses to use an exchange that is not professionally managed and does not employ best security practice, it is possible that Bitcoin exchange balances might be compromised as the affairs of the failed exchange are resolved. Since the exchange may well be located in a non-US country, such resolution can take many months and result in significant loss of working capital for the small businesses and customers affected,” testified L. Michael Couvillion, Ph.D., from Plymouth State University.
The regulatory future is uncertain.
Dr. Couvillion testified that state governments have adopted a wide variety of Bitcoin-related regulations, aside from the IRS’ ruling on the currency. The inability to predict how Bitcoin will be handled in the future by federal and state governments may pose additional risks to small business owners looking for a more certain method of payment.