Finances and Taxes

Thinking About Accepting Cryptocurrencies as a Payment Method? Here’s What You Need to Know

J.J. Starr  
A woman looks at a chart on a tablet.

Bitcoin has been grabbing headlines for years, but it’s just one of many alternative currencies called cryptocurrency. After years of operating outside the mainstream, crypto is becoming more widely accepted. For example, several major corporations accept cryptocurrencies as a form of payment, including Microsoft, Overstock, and even Burger King.

These developments have many business owners asking is cryptocurrency right for my small business? If you’re asking the same question, you should begin by assessing your understanding of cryptocurrency in general. Once you have a clear understanding of what cryptocurrency is and how it works for business, you’ll be able to determine if you want to accept it as a payment method.  

A note before we begin: while this article is meant to inform you about cryptocurrency basics, it’s by no means a substitute for speaking with your accountant. Before you decide anything, you should work with your accountant to understand the implications of accepting any currency. Should you decide to accept cryptocurrency, work with your accountant to set up the infrastructure to do so effectively. 

Cryptocurrency basics for merchants

Before you can decide if cryptocurrency is best for your business, you should understand a few crypto basics. The more you know about what cryptocurrency is and how it works, the easier it will be to determine if accepting cryptocurrency as payment will help you reach your business goals. 

What is cryptocurrency and how does it work?

Cryptocurrency is a digital currency that can be exchanged online as payment for goods and services. Crypto relies on a technology called blockchain to work. Blockchain is a shared, (nearly) unalterable ledger used to record transactions and shared by members of the blockchain network. 

Because ledger information is shared in multiple places, it is decentralized. There is no centralized control of the ledger, and thus no single point of vulnerability or failure that could be exploited by hackers. For this reason, blockchain transactions are generally considered safe. (This does not mean that your crypto wallet is safe from hackers, though. Keep reading.)

Some investors also buy and hold cryptocurrencies, much like one would buy stock. However, these investments are highly speculative. Though their value fluctuates, cryptocurrencies are not like stocks in that they don’t belong to an entity that generates a profit. In order to make money from a cryptocurrency investment, you need someone to purchase the currency from you for a higher price than what you paid to get it. 

Types of cryptocurrencies

There are more than 10,000 cryptocurrencies in existence, but only a few dozen cryptos of note at this time. The most common cryptocurrencies accepted as payment are:

  • Bitcoin
  • Bitcoin Cash
  • Litecoin
  • Ethereum

Review each cryptocurrency carefully before you decide to accept it. The currency(s) you decide to accept should meet a few standards to ensure they’re a reliable form of currency (i.e. it will hold its value and be easy to exchange). You should also review the currency’s ethical standards to ensure it’s in line with your and your company’s values (more on this below).

What types of businesses are suitable for crypto transactions?

There are some advantages and some risks involved in cryptocurrency transactions that make the payment type more suitable to companies with certain characteristics. The companies have one or more of the following characteristics:

  • Are an e-commerce business or complete most transactions online
  • Process a significant number of overseas transactions
  • Process large transactions on average
  • Serve customers that ask if crypto transactions are accepted
  • Have an accountant or bookkeeper with advanced knowledge of cryptocurrency (or is willing to learn)

How businesses accept crypto transactions

There are several ways to process transactions using cryptocurrencies. As of this year, PayPal began accepting Bitcoin, Ethereum, Litecoin, and Bitcoin Cash. Other ways to process cryptocurrency transactions include:

Bitpay is currently the most popular way to accept crypto transactions. But if you want to avoid using a third party, you can set up manual crypto payments. You’ll need to set up a cryptocurrency address for each sale and provide instructions to the buyer for each transaction. This will require more time and advanced knowledge but it isn’t terribly difficult to learn. 

Cryptocurrency and bookkeeping

To record crypto transactions for bookkeeping purposes you need two types of tools:

  • Accounting tools
  • Cryptotracking tools

For accounting, you can use bookkeeping software that is capable of tracking cryptocurrency, such as Quickbooks Online. Alternatively, you can use software that allows for custom journal entries, such as FreshBooks. 

The purpose of cryptotracking tools is to make the process of tracking crypto gains and losses easier, which in turn makes it easier to do your taxes (more on tax implications below). You’ll want something that can sync automatically with your wallet. CoinTracker is a popular tracking tool that allows you to categorize your transactions, plus it syncs with crypto wallets and tracks price fluctuations. 

Crypto wallets

If you’re accepting cryptocurrencies, you’ll also need a cryptocurrency wallet. A crypto wallet is what allows you to use blockchain technology. You use this digital wallet to send or receive cryptocurrency and monitor your balance. In this way, it is similar to a bank account. 

You can set up your crypto wallet in one of two ways. First, you can use the official wallet of a specific cryptocurrency. For example, you can set up a Bitcoin wallet. This is suitable for businesses that accept only one type of cryptocurrency. 

The other option is setting up a third party wallet. Third-party wallets are great for storing multiple types of currencies. The best third-party wallet providers are:

There are several ways to “store” your third party wallet. You can use a desktop wallet, which is the most secure. You can also use an online wallet where your information is stored in the cloud. Online wallets are the easiest to access. Another popular wallet form is a hardware wallet, where you store your information on a removable device such as a USB stick. 

Depending on the wallet you choose, you may be able to store your information in more than one way. For example, an online wallet with a corresponding USB. Always be sure to backup your wallet, whichever type you choose. 

How cryptocurrency transactions work

Accepting a cryptocurrency transaction is much simpler than it may seem. The person purchasing your goods or services will use wallet software to transfer a balance from their account to yours. The transaction is encrypted and recorded on the public ledger through a process called mining

You can turn your cryptocurrency into cash in one of two ways. First, you can sell your currency on an exchange. When you sell peer-to-peer, you avoid larger fees. However, you may find it easier to use a broker. With a broker, a third party exchanges your currency for you. While this costs more, it takes the task off your shoulders. 

Is cryptocurrency safe?

You might be surprised to learn that cryptocurrency is thought to be fairly safe because it bypasses third-party verification (TPV), which is the process of verifying using a third-party organization. TPV organizations are often targeted by hackers and data breaches are common. Debit and credit cards, for example, tend to rely on TPV.

But blockchains can also be hacked, albeit not as often. Plus, cryptocurrency is subject to greater market volatility, which means that a payment you accepted yesterday could cost dramatically less today. 

Finally, we should note that, unlike your bank account, cryptocurrency is not backed by the Federal Deposit Insurance Corporation (FDIC). 

What are the tax implications of using cryptocurrency?

Cryptocurrency is treated like a capital asset under current IRS rules. Capital assets are considered property. Capital assets you’re already familiar with include:

  • Houses
  • Cars
  • Stocks
  • Bonds
  • Artwork
  • Collectibles

Like most capital assets, cryptocurrency is subject to capital gains taxes. That means you’ll pay the capital gains rate for any cryptocurrency profit or loss you realize. You’ll likely realize your profit or loss when you exchange your cryptocurrency for cash. But there are other ways you can trigger a capital gain or loss:

  • Swapping or exchanging one cryptocurrency for another
  • Spending cryptocurrency on goods and services

This is why you must keep meticulous records when accepting crypto as payment, including the value of the currency on the day it was accepted as payment. It’s also why using crypto tools is so important. 

As a final reminder: speak with your accountant before deciding if cryptocurrency makes financial sense for your business. 

Are irreversible transactions good or bad?

Cryptocurrency transactions are irreversible. This has advantages and disadvantages. Irreversible transactions means no charge-backs and no surprise losses. But, if a customer does want a refund, you’ll need to navigate that on your own. That means tracing the transaction and manually paying it back, while adjusting for any changes in the exchange rate. 

Transaction ServiceFee
PayPal2.89% plus a fixed fee
Venmo1.9% plus $0.10
American Express1.4 to 2.5%
Discover1.55 to 2.5%
Mastercard1.5 to 2.6%
Visa1.4 to 2.5%
BitPay1%
Manual<1%

Low payment fees

There are significantly smaller transaction fees when using cryptocurrency compared credit card and digital transaction companies. Here’s an overview of transaction fees by service:

As you can see, processing cryptocurrency payments can be much less expensive than other options. International transactions are also significantly less expensive, as there are no currency exchange fees. If your business does a lot of international transactions, accepting cryptocurrencies could be a good fit. 

Of course, lower transaction fees aren’t the sum total of what it costs to accept cryptocurrency. As we’ve shown, it’s tedious to complete and track all your crypto transactions manually, which is why purchasing crypto tools is recommended. The cost of these tools can cost anywhere from less than $100 to more than $1,000 annually. Generally speaking, the more crypto transactions you complete, the higher the cost for crypto tools. 

Ethical considerations

The final piece to figuring out if cryptocurrency is right for your business is to understand the ethical considerations of using it and deciding if that fits within your business’s core values. Cryptocurrency can be used for good and bad. 

On the one hand, cryptocurrency represents an interesting alternative to traditional currency. In theory, the ability for a currency to be self-governed and transparent could combat corruption in the financial world. On the other hand, cryptocurrency in practice has been used as a ransom payment tool and funded terrorist organizations

When evaluating which currency to accept, you should evaluate the stability of the currency alongside its ethical implications. Questions to ask about the currencies you’re thinking of accepting:

  • Who’s in control? How transparent is its governance?
  • How is it regulated?
  • Who benefits from this cryptocurrency?

Is cryptocurrency bad for the environment?

Cryptocurrency does have an outsized carbon footprint— larger than Google, Apple, and Amazon combined! Bitcoin alone generates nearly as much e-waste as the country of Luxembourg. A single transaction consumes 1700 kilowatt-hours of electricity, which could power the average U.S. home for two months. 

Here’s a quick breakdown of how cryptocurrencies impact the environment through energy consumption:

  • Storing massive amounts of information online consumes a ton of energy to run servers.
  • Most of a cryptocurrency’s energy consumption is felt during the process of adding transactions to a cryptocurrency’s ledger (i.e. mining). But, cryptocurrencies do not have to use mining to record transactions. 
  • Much of this energy is produced with fossil fuels, such as coal and natural gas. 

However, this doesn’t mean that cryptocurrency is inherently unsustainable, only that it is currently processed in an unsustainable fashion. In the future, the carbon footprint of cryptocurrency may be reduced. The Crypto Climate Accord, backed by the UN, is an initiative with the goal of running blockchains of 100 percent renewable energy by 2025.

It should also be said that, just as the ethics of each currency is different, so too is its environmental impact.

Updated: February 4, 2022

J.J. Starr
J.J. Starr J.J. is an educator, personal finance writer, and former registered banker. She's helped dozens of small businesses set up and manage their day-to-day expenses, secure business loans, and develop financial plans.

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