El Salvador’s adoption of Bitcoin as legal tender in September 2021, only months after China outlawed mining of the digital currency, neatly captures the controversy and conflict excited by cryptocurrency. Businesses and people considering accepting Bitcoin as payment for goods and services can evaluate the decision by balancing the currency’s benefits in speed and freedom from fees and regulation against its volatility, complex tax picture, complex history and uncertain future. You might find it helpful to consult a financial advisor before you agree to accept Bitcoin as compensation.
The Basics of Bitcoin
Bitcoin is the world’s first cryptocurrency. The idea of a currency created using cryptography rather than through the mechanism of a central bank goes back to 1998. In 2009, Bitcoin was introduced by a still-mysterious person who went by the name Satoshi Nakamoto. Thousands of cryptocurrencies have since been devised, but Bitcoin still ranks as most popular and expensive.
Cryptocurrency, also called digital currency, uses digital tokens stored in a widely distributed database that employs secure blockchain coding to record the token’s ownership and transaction history. Unlike currencies created by central banks that get their value from the guarantee of the government banking system, Bitcoin has no intrinsic worth and are valued only by supply and demand. Therefore, the value of a token can vary widely over a short period of time, meaning the extraordinary volatility of Bitcoin on digital currency exchanges represents one of its most distinct qualities.
When first issued in 2009, each bitcoin token had no market, and, in turn, no value. Within a couple of years, a token was trading for $1. In April 2021, a single bitcoin was trading for over $63,000. However, within weeks, the value of the tokens had fallen by more than 50%.
Despite the difficulty of predicting Bitcoin’s value, businesses are increasingly accepting it. In September 2021, Coinmap reported that more than 23,000 establishments worldwide took the cryptocurrency in exchange for a wide variety of goods and services.
Laws in the U.S. and elsewhere require employers to pay wages in legal currency. That makes using it to meet payroll problematic, if not actually illegal. However, independent contractors and freelancers are reportedly embracing the tokens as suitable payment for their services.
Getting paid in Bitcoin, requires setting up a free account on a digital currency exchange, such as Coinbase. Recipients of crypto payments can then store their bitcoins in digital wallets. They can sell their tokens on the digital currency exchange for legal tender.
What Are the Pros of Receiving Bitcoin as Compensation?
Bitcoin transactions occur instantly, with tokens showing up as owned by the seller of a good or service as soon as the deal is complete. Cryptocurrencies also exist outside the regular banking system. Therefore, there are no exchange fees, credit fees or other costs associated with a Bitcoin transaction. So the speed, certainty and low cost of Bitcoin transactions can make them attractive for doing international business.
The volatility of Bitcoin tokens can be considered a benefit, as well as a potential drawback. For anyone who thinks bitcoins are going up in value, accepting them in payment is a way to invest in an asset with potential for rapid price gains.
The risk of getting paid in Bitcoin can, to some extent, be managed. One way to mitigate the volatility risk is to receive part payment in cryptocurrency, and the rest in legal tender. Bitcoin recipients could also choose to sell some or all of their digital tokens immediately, locking in the current value. This is as opposed to holding the cryptocurrency and accepting the possibility that it could be worth much less in the future.
With all its problems and promise, Bitcoin has an undeniable high profile and a distinctly trendy aura. Businesses and individuals can distinguish themselves by announcing that they accept Bitcoin. Similarly, offering to pay employees with Bitcoin may be a way to attract future-thinking workers.
What Are the Cons of Getting Paid in Bitcoin?
Volatility may be the main drawback to accepting Bitcoin for payment. A business or individual could lose a substantial portion of their payment in days or even hours if the value of the currency suddenly drops. Another limitation is that most vendors do not accept digital currency as payment. So anyone accepting Bitcoins has to sell the tokens, turning them into legal tender such as U.S. dollars, in order to use them to pay bills.
Additionally, Bitcoin transactions are irreversible. When a bitcoin is accepted as payment, there’s no way to undo the deal. Credit card companies can’t charge back vendors who are paid in bitcoins, for instance, and refunds are strictly at the option of the seller.
As shown by the contrast between El Salvador and China, the regulatory environment around Bitcoin is both complex and evolving. Regulators in the U.S. have adopted a fairly loose approach to crypto, but there’s no guarantee this will continue. Anyone who builds up a pile of bitcoins faces the possibility that negative rule changes could have a disastrous effect on the token’s value.
Each country also taxes Bitcoin in widely different ways. The IRS taxes Bitcoin as property rather than income. So an American bitcoin owner who sells tokens for a value higher than when they were acquired will owe taxes at either regular income tax rates or capital gains rates. Which one you pay depends on how long the tokens were held.
Bitcoin transactions are also completely anonymous. While this might seem like a benefit of Bitcoin, it’s actually a main reason they have been a preferred method of receiving payment by scammers, hackers and purveyors of illegal offerings. These include the notorious Silk Road, an online black market for banned drugs. Although Silk Road was eventually shut down, with regulators later confiscating a reported $1 billion in Bitcoin. The cryptocurrency world remains rife with scammers and hackers and Bitcoin retains an association of illegitimacy.
Bottom Line
Bitcoin is the leading example of cryptocurrency and is increasingly accepted by individuals and businesses as payment for goods and services. The speed and freedom from fees Bitcoin transactions offer make it appealing to people doing business internationally. However, the cryptocurrency’s volatility and shifting regulatory environment mean it is much riskier to accept it compared to legal tender currencies.
Cryptocurrency Tips
- Cryptocurrency is one of the riskiest assets anyone can hold these days. Before considering buying, selling or accepting Bitcoin or another digital currency as pay, consulting with a financial advisor could be helpful. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- You can forecast how much your equity investments can increase over time by using our investment calculator.
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