Time for your dealership to accept cryptocurrency?
By Nathaniel Yost
A quick Google search under “car dealerships accepting crypto” finds numerous articles about a growing number accepting Bitcoin and similar digital currencies, begging the question: Should my dealership consider it?
While news articles about the growing number of firms accepting crypto may lead you to believe it is similar to other kinds of payments, the reality is far different. Accepting cryptocurrency means assuming a higher level of risk -- and record-keeping.
Virtually every week brings news of cryptocurrency value swings that can have severe consequences: If a $70,000 Corvette sold on November 5 for 1 Bitcoin, by November 19 the value of those Bitcoins dropped by 34 percent.
However, as companies like Starbucks, WholeFoods, Microsoft, and others announce they accept crypto, digital currency is quickly becoming part of everyday society.
Before accepting cryptocurrencies, it is crucial to establish how your dealership will handle these transactions. Key policy questions include:
- Will the crypto be converted to dollars immediately?
- What kind of crypto will you accept, and how will you process it?
- Are your accounting and IT departments ready for the additional work, oversight, and security crypto trades require?
The following is a closer look at how you may want to answer these questions.
Whether to convert cryptocurrency to cash immediately
Because of the wild fluctuations in cryptocurrency values, many dealerships convert digital currency to cash immediately to lock in the sale price. Also, many third-party companies that handle crypto for companies make a point of converting digital currency purchases to cash for their clients at the close of every business day.
Deciding what crypto to accept and how to process it
The questions of what kind of cryptocurrencies to accept and how to handle them are closely related, especially if you want to use a third party to handle your crypto transactions.
Various companies, such as BitPay, Coinbase, and BigGo, make it easy for companies to accept cryptocurrencies and immediately convert them to cash. Think of these companies like credit card processors, trading the crypto for cash, assessing a transaction fee, and depositing the money into your bank account.
Alternatively, dealers can set up their own fund on an exchange. Exchanges allow users to buy, sell, and trade various cryptocurrencies.
Many of the above services offer users the opportunity to create a “wallet’’ they can use to easily buy, sell, and trade various cryptocurrencies. The most common is a “hot wallet,’’ meaning it is connected to the internet and is easy to use. By comparison, a “cold wallet’’ is like a thumb drive -- not connected to the internet until you decide to initiate a transaction. Because cold wallets are offline until you begin the transaction, they are considered the most secure.
However, not all platforms accept all the types of cryptocurrencies available – at least not yet. You will want to look for the cryptocurrency platform for businesses that best serves your needs.
Record keeping and avoiding IRS headaches
Despite having “currency” in its name, Bitcoin, Dogecoin and the rest have more similarities with stocks than cash. Whether trading one cryptocurrency for another or for cash, each trade must be separately documented and reported as a gain or loss transaction on your tax return. When you trade/sell crypto, you need to remember the original value of the crypto, which determines if you are declaring a gain or loss.
Many virtual currency exchanges are offshore and may trigger Foreign Bank Account Report (FBAR) reporting requirements. U.S. taxpayers are required to file for foreign bank or securities accounts that exceed $10,000 at any point in the tax year or risk stiff civil and potential criminal penalties.
The good news is that more third-party processors are providing record-keeping for tax reporting purposes. When selecting a cryptocurrency processor or platform, you will want to pay careful attention to whether you can use their reporting – as you would with a regular brokerage account – or if you will need to track transactions yourself.
Either way, you will need to make sure your accounting department is fully knowledgeable about your crypto policies and practices. Working with your IT department, they will need to provide oversight to ensure tax compliance, safeguard security keys, passwords, and other crypto-related access tools, and guard against cybercrime.
- For more information about accounting for cryptocurrency, click here
As cryptocurrency use becomes more prevalent, businesses in every sector will likely feel more pressure to accept at least some form.
Dealers who decide to accept cryptocurrency should do so cautiously. Data breaches can and do happen. Exchanges are not impenetrable. Hackers are everywhere. Wallets can be lost or stolen. Security keys forgotten.
You will need to evaluate your risk appetite and consider your accounting office and IT capabilities – all of which will play a role in the process.
While widespread acceptance is not here yet, technological changes come quickly. For dealers who understand the risks and want to embrace the technology, the ability to do so is here.
The Boyer & Ritter team can help dealers thinking about entering this space evaluate the risks and potential rewards.