Expert Guide: Accepting Crypto from Customers and Clients
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From doges to moons to apes, crypto seems like a fun place to be. But when it comes to actual utility, the question remains: how easy is it to accept crypto payments for work you’ve done or an item you’ve sold?Cryptocurrency payments are much easier to work with than just a few years ago. Globally, Visa estimates about a quarter of small and medium-sized businesses plan to accept bitcoin payments and digital currencies in 2022. Below, we discuss two methods—the external custody method and the DIY method—and explain the tax implication of crypto payments. Here’s how to get going:
Advantages of accepting crypto payments
The natively digital nature of cryptocurrency makes it fast, traceable and secure. These properties make it an excellent solution for transferring value from one person to another. We’ve come a long way from bartering eggs for fabric…
Transactions through a crypto network take minutes or seconds to process, not days. And once the transaction completes, the funds are yours —no need to wait for checks to clear or banks to process deposits.
Once the crypto blockchain records a transaction, it’s permanent and can’t be reversed. So unlike credit cards, buyers can’t dispute a transaction and hold up funds during arbitration. This can be great to avoid fraud, but it is a double-edged sword: you may need to manually deal with more customer support requests for refunds.
No payment limits
Some payment methods limit how much you can transact at once. Crypto has no limits—you can move millions of dollars worth of crypto in one transaction if you wish.
Crypto transactions are peer-to-peer, meaning they directly pass from one user to another without going through an intermediary. This cuts out fees involved in other payments, like SWIFT transfers.
The crypto network charges a fee subject to fluctuation depending on network demand. Fees historically average from fractions of a penny to 4%, depending on the network. Traditional payment processors, on the other hand, charge both fixed and variable interchange and transaction fees, cutting into your margin.
Positive brand identity
Accepting crypto could leave your customers with a positive view of your company. Being open to different payment solutions could play a part in your brand identity and differentiate yourself from competitors—especially in a global market where enthusiasm around crypto varies from country to country.
Crypto networks are international, so you can accept payments from customers worldwide without having to deal with foreign currencies. For users without access to a reliable banking system, crypto can be a way to make payments safely and securely.
People in countries with unstable currencies may prefer to deal in crypto because it’s more stable than their fiat (home) currency.
Disadvantages of crypto payments
While cryptocurrency solves a number of pain points with payments, vendors should still prepare to address a few challenges:
Tricky refund process
Transactions on a crypto network are permanent. To issue a refund, you need to send a new transaction.
You’ll want to re-confirm the customer’s address before sending the refund because the customer may have sent from an exchange or lost access to the sending address. And because crypto can be volatile, the amount you send might be different.
Additional need for customer support
You may deal with more support requests about crypto from curious customers. As people try out crypto for the first time, they might get stuck at a step or make mistakes that your support team will have to help troubleshoot.
Too many types of cryptocurrencies
There are hundreds of different crypto coins and tokens in the crypto ecosystem, all with different capabilities and characteristics. This can be overwhelming to manage, so it’s best to stick with a few you feel comfortable working with.
Complex tax and accounting
You can’t record your bookkeeping in bitcoins instead of dollars because bitcoin is not legal tender. You’ll need to take a few additional steps for bookkeeping when your business accepts crypto payments (more details below).
You should inform your accountant or tax advisor of your playbook so they can best assist with tax planning.
The external custody method: great for commerce
One way to accept cryptocurrency in your payment flow is to integrate with a third-party payment solution that accepts crypto payments on your behalf. Think of it like a crypto version of payment solutions like Stripe or Square. The processor can store your crypto for you or automatically convert it into cash.
When users check out on your site, they’ll follow the payment processor’s instructions to send crypto. In most setups, the processor will lock in the exchange rate to minimize price volatility and then present a time-sensitive QR code or address for the customer to send funds to. Crypto processors accept many types of crypto, providing additional flexibility for the customer.
If you’re already using an eCommerce platform like Shopify or WooCommerce, you can use an API integration or plugin to connect the crypto payment gateway to your shop.
If you’re just starting out (and crypto is the only payment system you want), you can use a hosted checkout system where the processor takes care of the entire checkout experience. Customers will click the crypto payment button and proceed through payment processing, just like they would for a debit or credit card checkout. If you offer retail transactions in-person, similar functions exist to integrate point-of-sale (POS) systems.
Either method will require a bit of setup, but overall it can be as easy as creating and connecting a merchant account. Three notable solutions are Coinbase Commerce, BitPay, and CoinPayments. All three offer conversions to fiat, a small transaction fee, and integrations with eCommerce platforms.
The DIY method: better for independent contractors
If you want more control over your crypto, you can accept crypto payments yourself using a personal cryptocurrency wallet. This is a great solution for freelancers or contractors for one-off projects because they don’t need a system for customer checkout. But because it requires manual input, this solution won’t be efficient for vendors that make multiple sales a day.
First, to request payment, create an invoice for your transaction. Include your business details, just like you would for payment via digital wallet like PayPal or direct deposit. Some third-party sites offer crypto invoicing, which can be useful to implement for recurring subscriptions.
Next, to accept funds, just share your wallet address with your customer. Your crypto wallet could be a wallet you personally control or one that an exchange like Coinbase controls on your behalf. Control, in this context, means ownership of the private key. Whoever knows the private key has full control over the wallet’s funds.
If you use a third-party invoicing solution, you can opt in to notifications when your payment arrives. But you can verify payment yourself by looking up your address in any blockchain explorer. If the network confirms the transaction, the payout will complete and the funds will be available to you.
Finally, you decide what to do with your crypto. You can spend it on other business expenses, convert it to fiat currency and transfer to your bank account, or hold onto it.
Tax and accounting implications of crypto payments
Accepting and holding cryptocurrency for business purposes adds some challenges to your bookkeeping and accounting practices.
Taxes: Crypto is taxed as property
For tax purposes, the IRS considers crypto to be property. That means you need to track its value when you acquire the cryptocurrency, convert it, and ultimately sell or otherwise dispose of it. The increase (or decrease) in value during these transactions are considered capital gains (or losses).
The IRS has a page with more answers on taxing cryptocurrency income.
Accounting: Record crypto income at its market value
Established businesses do their accounting either under International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP). But neither of those accounting standards have concrete standards for cryptocurrencies yet.
The current guidance, according to the IRS, is to record income at the fair market value of the cryptocurrency in US dollars. For example, if a client pays you 1 ETH on a day where the market price of ethereum is $3,000 (USD), you record $3,000 in income.
If you decide to hold cryptocurrency on your balance sheet, your accountant will need to determine how to record it properly. In general, cryptocurrency is not considered cash or a cash equivalent. Public companies that currently hold bitcoin, such as Tesla and Square, treat it as an “indefinite-lived intangible asset” as defined under GAAP. If the value of an intangible asset falls, the company will need to take an impairment loss on their books.
Fortunately, small businesses don’t need to follow public accounting standards for their own accounting. Business owners can continue to use their preferred cash or accrual method of accounting and track any capital gains or losses incurred when selling or converting crypto assets.
Talk to your accountant for help with setting up your crypto recordkeeping system.
Cryptocurrency withdrawals with Deel
Deel helps employees and independent contractors around the world get paid, no matter where they choose to work. While it’s not yet possible to be directly paid in crypto, Deel Crypto lets contractors withdraw earnings directly to a Coinbase account in Bitcoin, Ethereum, USDC, Dash, or Solana.
To learn more about payment options on Deel, book a free consultation.
Disclaimer: This post is provided for informational purposes and should not be considered legal or financial advice. Consult a professional for more information.