Bitcoin continues to capture the attention of venture capitalists, retail businesses, government regulators, the media, and politicians over five years after its inception. Despite the recent shutdown of Mt. Gox (formerly the largest Bitcoin exchange), and subsequent drop in the Bitcoin exchange rate, the crypto-currency is still growing in acceptance and use. More and more businesses are starting to accept them in-lieu of traditional currency, and the United States is starting to issue regulations and guidelines concerning their use as a currency. However, many legal issues lurking behind crypto-currencies remain, and untangling them is still a work in progress. This article will cover the basic legal issues of accepting Bitcoin for your business.
So what do we know? Bitcoin is the most popular of a number of virtual crypto-currencies, a form of money with no physical presence. Owners of Bitcoins can sell them for traditional currency to other users, through online exchanges. Bitcoins can also be used in some stores or websites in exchange for goods and services, and some technologists accept them directly in exchange for services like web design and development.
Today, Bitcoin is the target of venture capital investment, criticism, praise, and confusion. Marc Andreessen, a software engineer turned venture capitalist in the technology space, has invested over $50 million in Bitcoin start-ups, and he’s not alone. Some estimate the total capital investment in the Bitcoin space will reach $300 million by the end of 2014.
Moreover, companies already accepting Bitcoin include Overstock.com, Virgin Galactic, WordPress, Reddit, Zynga, Tigerdirect, Stripe merchants, and at least one Tesla dealer. Law firms are starting to get in on the action too, as a firm in Houston and Illinois started accepting Bitcoins as payment last year.
Legal Issues with Accepting Bitcoin and Taxes
With all this interest brewing, it’s about time the legal issues surrounding Bitcoin’s use are cleared up. Foremost, is accepting Bitcoins as payment legal?
It is legal to accept Bitcoin, provided one follows the new guidelines provided by the IRS for tax purposes. As of March 2014, the IRS classifies Bitcoin and other virtual currencies as property, rather than currency, and transactions over $600 are taxed the same way the agency treats property transactions. This includes payments, gains realized from investing in Bitcoins, and income derived from producing the Bitcoins (known as “mining”).
The Bitcoins must be valued at their “fair market value,” according to the IRS, which can be based on the going prices at the online exchanges. This can be problematic for vendors accepting Bitcoin, as Bitcoin prices fluctuate daily, and sometimes by significant percentages. Additionally, if used as payments to employees or contractors, it must be listed on their W-2 or 1099 forms. These payments are subject to the same information reporting that any property payment is.
Problems with Lawyers Accepting Bitcoin
Bitcoin’s fluctuation in price can be problematic for any company, but it poses a unique challenge for lawyers. On one end of the spectrum, a price drop can leave the lawyer working for almost nothing, but the bigger problem is on the other end of the spectrum. A price increase in Bitcoin could effectively cause the lawyer’s rate to become “unconscionable,” a violation of the ethical duty as a lawyer to avoid charging excessive fees. Such a rate is unable to be upheld if the client sues, and may even expose the lawyer to sanctions from the State Bar.
The Bitcoin Refund Issue
For merchandisers especially, Bitcoin also presents an issue for returns and exchanges. Say someone purchases one Bitcoin worth of stuff when the spot price is $600, but later decides to return it because the product is defective. If the value of a Bitcoin increased to $700 or decreased to $500, one of the parties is going to lose out.
In fact, if the price of a Bitcoin increases, it creates a moral hazard by incentivizing the customer to return the product for the Bitcoin. Overstock.com has chosen to solve this issue by offering in-store credit for returns, and places the risk of currency fluctuation on the customer by limiting that credit to the exchange rate at time of purchase.
Today, accepting Bitcoin as payment is still tricky, but it is becoming more and more common. Most of the challenges and legal issues with accepting Bitcoin arise due to the crypto-currency’s tendency to fluctuate in value so rapidly. Purchasing something with Bitcoin is essentially like buying something with shares of a volatile stock that you own – while it could be valuable, tomorrow it could be worth half as much, or even double.
Before accepting Bitcoin at your business or online store, it would be wise to consult with a lawyer and tax advisor to ensure your business complies with all federal, state, and local laws. You can find a lawyer at LawKick for free.