Florida retailers and other small businesses are used to handling credit cards and other forms of online payments. Then there are so-called “virtual currencies” like Bitcoin. Many traditional retailers have started to accept Bitcoins as payment for goods and services. But what are the legal risks and ramifications of Bitcoin?
What Is Bitcoin?
Bitcoin is a peer-to-peer network that allows for near-instant payments among its users. The actual “Bitcoins” are data generated by a computer algorithm that limits the total number of available units—much like the gold standard once limited the supply of currency. Bitcoin users maintain a virtual wallet that records not only their own Bitcoins, but also every transaction made throughout the network. This is known as the “blockchain.”
Is Bitcoin “Money”?
The United States government has the exclusive right to declare what is (and is not) legal tender—i.e., money—within its borders. Bitcoin is not recognized as legal tender in the United States or Florida. That does not make it illegal to use Bitcoins in the course of your business, but it does mean that it and other virtual currencies are not backed by any government.
The Internal Revenue Service considers Bitcoins a form of property rather than currency. This means that if a retailer accepts Bitcoins as payment for goods, the sale must be recorded in dollars based on the “fair market value” of the Bitcoins on the date of the transaction. Similarly, if you pay an employee or an independent contractor in Bitcoins, those transactions must also be reported to the IRS in terms of dollars. And if you later exchange any Bitcoins you receive for dollars, you will need to report any difference in the value from the date you received the virtual currency as a capital gain or loss.
Risks of Using Bitcoin
In March the Florida Office of Financial Regulation (OFR) issued a consumer warning regarding the use of Bitcoins and other virtual currencies. The OFR identified several risks to customers and businesses of relying on Bitcoin over more established forms of payment. First and foremost, Bitcoin has no insurance guarantee. A traditional bank account is insured against loss by the Federal Deposit Insurance Corporation. Bitcoin has no central bank or governing authority. If a virtual wallet is lost, hacked or destroyed, the Bitcoins contained within them are also lost.
Bitcoin is also unpredictable. Many Bitcoins are held by speculators hoping to score a quick profit from market volatility. This makes the value of Bitcoin unstable relative to the dollar. Small businesses need to take steps to mitigate this risk if they decide to accept payment in Bitcoin—for instance, by converting Bitcoins to dollars right away and not holding significant amounts in virtual wallets.
None of this is to suggest Bitcoin and other virtual currencies will not continue to develop and improve. But small businesses need to be aware of the risks and take appropriate steps before wading into the pool of virtual currency. To stay on top of Bitcoin’s emerging legal status, you should consult with an experienced Florida business attorney. Contact Naples business attorney John S. Sarrett today if you have any questions or concerns.