It might happen sooner rather than later. You’ll finish up a project with a client and they’ll pop the question: “Can I pay you in Bitcoin?”
As a solopreneur you know how important it is to get that next check, but what if it’s not a check? What if it’s not even real money? What should you do?
Bitcoin is over 10 years old at this point and rocks a $1.1 trillion market cap at the time of writing so it’s no longer that weird thing your cousin Jimmy keeps talking about. Bitcoin is here and it has implications whether you decide to accept it as payment or not.
So, should you say yes? If so, what happens next?
I recently had the chance to sit down with my favorite accountant, Alex, who was all too eager to talk Bitcoin. In this article, I’ll share what we discussed including how to handle Bitcoin payments, what information should you be tracking for your accountant, and tax implications if you ever decide to cash out.
Let’s get started.
(Oh, below is a link to our recorded discussion, and here is a transcript if you feel like reading along).
Don’t get caught flabbergasted by next year’s tax bill if you are self-employed and haven’t been paying your estimated quarterly taxes. That’s right, even if you have a full-time job and earn a side hustle income, the IRS still requires you to cough up their share. In this week’s episode, Alex and Declan share everything you need to know about self-employment taxes.
Learn more at simplefiscal.com
Reasons to say “Yes” to Bitcoin
It’s no use covering what happens if you say “no” to Bitcoin payment so let’s get started by talking about all the positives.
Bitcoin transactions are fast and cheap. There currently exists a limited number of options at your disposal to send and receive payments around the world. Paper checks are slow and difficult to track. PayPal isn’t offered everywhere. And bank fees, let’s not get started on bank fees.
If you want to receive a payment in Bitcoin all you need is a wallet, a digital wallet that is. When a client sends you a payment, it clears in 10–30 minutes (compared to 1–3 days for bank transfers) and only costs ~1% in fees (compared to nearly 4% in fees for using PayPal). And, because you’re sending a peer-to-peer payment, there’s never any threat of chargebacks (when a merchant payment processor takes away your money and gives it back to the buyer).
Once the Bitcoin is in your business’s possession, you’ll need to record the amount (in USD) and fees associated with the transaction. Your accountant will record these as income and expenses on the balance sheet.
Now, if you’re not hip to Bitcoin yet, you can simply convert the Bitcoin you received into USD that very same day and be on your merry way. (We’ll cover what happens if you hold onto your Bitcoin and cash out later.)
It’s seriously that easy.
What happens if you decide to HODL?
Okay, I haven’t been upfront with you. Bitcoin, although called a cryptocurrency by kids these days, is not, in fact, considered currency in the eyes of the IRS.
Uncle Sam (bless him, he’s slowly catching on) see’s Bitcoin as something else: an asset.
What does this mean if you decide to hold onto your Bitcoin for future use? Well, let’s take a look at an example I stole from this very helpful article:
Let’s say you accepted $5,000 worth of Bitcoin for a web design project. You tuck it away into your digital wallet and forget about it for a few years. One day, you open your wallet and realize your $5,000 of Bitcoin is now worth $45,000 (wow much coin!). You decide it’s time your web development business purchases a Tesla (who accept Bitcoin btw). You take your Bitcoin to the Tesla store and say “Gimme one Tesla plz.” Mr. Musk says “Okay, here you go. That’ll be $45,000 of Bitcoin.” You send him the monies and off you drive into the sunset with your brand new Tesla. Surely, the IRS can’t find a way to pinch a little off the top from this highly unlikely scenario, right?
(Oh, in case this highly unlikely scenario ever plays out please read through our article on how to lower your tax burden.)
Well, I’ve got some bad news for you. You didn’t buy a shiny new Tesla with your shiny new Bitcoin, that’s not how the IRS sees it. What the IRS saw was you selling your Bitcoin for $40,000 worth of capital gains ($45,000 current value minus $5,000 of the original value) then buying a shiny new Tesla with the gains. Now, depending on which tax bracket you fall under, you could be paying 10%, 20%, or even 30% of capital gains tax all because you wanted a shiny new Tesla.
Seems kind of unfair right?
Fairness aside, until Bitcoin — and cryptocurrency in general — is treated as currency, this is the reality we have to face if you decide to hold onto your Bitcoin.
Does Uncle Sam even need to know?
Okay, that’s definitely not the question you should be asking. I’m all for finding legal means to lower your tax burden, but failing to maintain your crypto records can lead to some serious consequences.
Typically brokers will send users a 1099 form at the end of the year but it’s still up to you to report the correct amounts. If you decide to sell, exchange, or purchase commodities with your Bitcoin then you’ll need to show any gains that you may have incurred (as per our Tesla example above).
In other words, Bitcoin might be the future of currency but until that day comes, Uncle Sam is still looking.
Will things change? Maybe, maybe not. And that’s the risk of accepting Bitcoin as payment, not only are you taxed on the revenue it originally brings in but also any gains it incurs if you decide to keep it as an investment.
Is Bitcoin for every small business owner?
If you’re a consultant or freelancer who sends out a few invoices a month, keeping tabs on your Bitcoin payments isn’t going to be too much of a burden for your business.
However, what if instead of being a consultant or freelancer, you run a large eCommerce site that handles hundreds and thousands of transactions every month. What if you want to start accepting Bitcoin as payment? How do you track all those transactions without your accountant throwing a hissy-fit when your taxes are due?
Well, we’re still in the early stages but certain services can make your (and your accountant’s) life a lot easier.
The first is commerce.coinbase.com (not an affiliate link) which can seamlessly integrate into popular eCommerce plugins such as Shopify and Woocommerce. Coinbase Commerce has special features such as converting accepted coins into USD to avoid volatility or customizing your own checkout page.
But what if you want another tool to easily manage all of your crypto tax liability with a simple PDF export for your accountant? Well, that’s where cryptfolio.com (not an affiliate link) comes into play. CryptFolio syncs with the major exchanges and wallets and can generate crypto tax forms for you.
Suddenly all this tracking and reporting doesn’t seem so scary after all.
My hope is that by now you have a pretty good idea of what happens after you say “yes” to accepting Bitcoin as a payment for your business. It’s strange to think that a currency that wasn’t even around when you were born is now being offered in exchange for your services.
However, this is the world we live in and if we want to be good solopreneurs, freelancers, and small business owners, we need to be prepared to make the best financial decisions.
If you ever decide to accept Bitcoin as payment, congratulations on venturing into new territory. And if you need to talk to an accountant to make that territory less scary, I know a pretty good one.