Should Your Business Invest In Crypto?

Investing in crypto is a big decision for any business, and there are several factors to consider. Crypto is becoming increasingly popular, with more and more businesses and individuals entering the digital currency market. Crypto offers businesses a host of investment, operational, and transactional opportunities. However, it is essential to carefully evaluate the risks and challenges associated with this new technology.

One of the primary considerations for businesses is the volatility of the crypto market, which can impact the balance sheet. Additionally, there are accounting and tax implications to address. The most common accounting treatment for cryptocurrencies in the US, for example, requires writedowns of losses but does not permit writeups of gains, which can be misleading to investors.

Another critical aspect is regulatory compliance. Businesses must navigate onboarding issues, including regulatory, accounting, and tax considerations, for which there is currently limited guidance. Furthermore, businesses need to be cautious about the security of their crypto transactions and investments, as blockchain exchanges are irreversible.

Despite these challenges, crypto offers several benefits, including access to new customer demographics, enhanced liquidity options, and simple, secure money transfers.

Overall, businesses considering investing in crypto should thoroughly research the opportunities and risks and proceed with caution, ensuring they have a clear understanding of their objectives and the potential implications.

What are the benefits of investing in crypto?

Investing in crypto can be beneficial for businesses in several ways. Firstly, it eliminates the need for intermediaries such as brokers, agents, or legal representatives, reducing complications and additional costs associated with traditional transactions. Crypto transactions are typically one-to-one, peer-to-peer affairs, fostering greater transparency, accountability, and clarity in audit trails. This also makes international trade more accessible by removing barriers, restrictions, and currency exchange complications, fostering a competitive advantage for early adopters.

Secondly, crypto transactions offer enhanced confidentiality and privacy. Each transaction is a unique exchange between two parties, protecting users from identity theft and ensuring that only the intended information is transmitted. This feature also enables businesses to negotiate and customise the terms of each deal.

Thirdly, crypto transactions generally incur lower fees than traditional payment methods. Since data miners are compensated by the cryptocurrency network, transaction fees are often waived or significantly reduced compared to those of traditional financial systems.

Additionally, cryptocurrency provides greater access to credit and financial inclusion. With an internet connection and basic knowledge of crypto networks, anyone can participate in the crypto ecosystem, including the unbanked population. This enables businesses to tap into a broader customer base and explore new markets.

Lastly, crypto empowers individual ownership and control. Unlike traditional banking systems, where account holders surrender stewardship of their funds, crypto users hold exclusive governance over their accounts and encryption keys. This ensures that transactions cannot be reversed without a specific agreement between the transacting parties, safeguarding against fraud and account tampering.

How do I open a business crypto account?

Opening a business crypto account is a straightforward process, but there are a few key steps to follow. Firstly, you'll need to choose a crypto exchange or broker that suits your business needs. Some popular options include Coinbase, Gemini, Kraken, and Robinhood, each offering unique features and benefits. Once you've selected a platform, you can begin the registration process, which typically involves providing information about your business, intended use of the platform, and ownership details.

Here's a step-by-step guide on how to open a business crypto account:

• Choose a Crypto Exchange or Broker: Select a platform that caters to your business requirements, such as Coinbase for its user-friendliness or Kraken for its wide range of assets.
• Gather Required Documents: You'll need registration and tax documents from your country of operation, disclosures of majority owners, and business bank account details for funding.
• Complete the Application: Visit the chosen platform's business application centre and fill out the necessary details. You may be asked about your business operations, intended use of the platform, and ownership structure.
• Verify Your Business: Provide the required documentation to verify your business, including registration certificates, tax identification numbers, and ownership information.
• Set Up Your Account: Once your application is approved, work with a platform representative to set up your business account and cryptocurrency wallet.
• Fund Your Account: Use your business bank account or other accepted methods to deposit funds into your new business crypto account.
• Explore Platform Features: Familiarize yourself with the platform's tools and services, such as trading features, security options, and any additional business-specific functionalities.

Remember to review the fees, security measures, and available cryptocurrencies for each platform before making your choice. Additionally, always prioritize the security of your account by enabling two-factor authentication and regularly updating your passwords.

What are the tax implications?

The tax implications of investing in crypto depend on the jurisdiction in which your business operates. For instance, in the US, the Internal Revenue Service (IRS) classifies cryptocurrencies and other digital assets as property. This means that standard property tax rules apply, with realized capital losses or gains typically determining crypto tax liability.

If your business sells cryptocurrency or digital assets for a profit, you are required to report the capital gain. Conversely, if your business loses money from a crypto sale, you can report a capital loss. The same is true for individuals.

Using crypto to purchase more cryptocurrency or trade for other tokens is also taxable. The IRS treats such transactions as short-term or long-term capital gains, depending on the holding period. Therefore, it is important to log the amount spent and the market value of the cryptocurrency at the time of the transaction for accurate record-keeping and reporting.

If your business uses cryptocurrency to make purchases, you are required to report any capital gains or losses. The net gain or loss is calculated at the time of the purchase. Additionally, if your business receives cryptocurrency as payment for goods or services, it must be reported as business income.

Cryptocurrency mining is another activity that can trigger tax consequences. If your business successfully mines a cryptocurrency or is awarded it for work done on a blockchain, it is taxed as ordinary income. However, if the crypto mining is part of a business enterprise, the expenses incurred in the mining operations, such as hardware and electricity, can be deducted from the income.

The tax implications of investing in crypto can be complex and vary depending on the specific activities and transactions undertaken. It is always recommended to consult with a tax professional or accountant familiar with cryptocurrency tax laws to ensure compliance with the relevant regulations.

What are the risks of investing in crypto?

Investing in crypto is risky, and there are several factors that businesses should consider before entering the crypto market.

Firstly, the volatility of crypto prices is a significant risk. Crypto prices are influenced by various factors, including news, speculation, and market manipulation, which can cause wild swings in value. Positive and negative news, such as Elon Musk's tweets or regulatory threats, can heavily impact market prices. The unregulated and anonymous nature of digital asset markets contributes to price volatility and manipulation.

Secondly, security breaches and cyber-security risks are a major concern. Trading platforms and third-party service providers may be vulnerable to hacking or other malicious activities. If a private key is lost, destroyed, or compromised, investors may lose access to their digital wallets and cryptocurrencies. Additionally, data from trend watchers like Cardify shows that over a third of crypto investors don't fully understand the technology, which amplifies the risk of security breaches.

Another risk to consider is the lack of regulatory frameworks and the complexity of crypto regulations. The inconsistent legal status of digital currencies across different regulators creates uncertainty for investors. There are also concerns about the potential use of cryptocurrencies by criminals and terrorist organizations, which may lead to future restrictions or bans. The tax treatment of cryptocurrencies is particularly complex and varies across jurisdictions, making it challenging for investors to understand their tax obligations and record-keeping requirements.

Furthermore, the majority of crypto is held in a 'digital wallet', which means it is effectively being 'minded' by a third party. This contrasts with traditional investments, such as shares, which are typically held by regulated companies, reducing the risk of loss. The fact that many crypto exchanges are based in foreign countries can also make it challenging to recover funds in the event of a problem.

Lastly, the market adoption of cryptocurrencies remains low due to various factors, including regulatory concerns, technology shortfalls, market volatility, and public misunderstandings. There is a chance that this new asset class may never be broadly adopted, leading to a complete loss of value.

While investing in crypto carries risks, it is important to note that there are also potential benefits, such as accessing new demographic groups, enhancing traditional Treasury activities, and providing an alternative to cash, which may depreciate over time due to inflation. However, businesses should carefully evaluate these risks and conduct thorough research before making any investment decisions.

How do I choose a crypto exchange?

Choosing a crypto exchange can be a challenging task, especially for businesses. Here are some key considerations to help you make an informed decision:

• Reputation and Security: The crypto space is prone to scams and fraud, so it's essential to choose a reputable and secure exchange. Look for an exchange with a physical address, transparency in operations, and a strong track record of security measures.
• User Experience and Features: Research the exchange's user interface and ensure it aligns with your business needs. Consider the features offered, such as different cryptocurrencies available, trading tools, and security options like two-factor authentication.
• Fees: Crypto exchanges typically charge fees for transactions, which can vary based on the exchange and your activity level. Understand the fee structure and consider how it will impact your business's trading strategies and overall profitability.
• Regulation and Compliance: Select an exchange that complies with regulatory requirements, especially in your jurisdiction. This is crucial for legal and tax purposes, as different countries have varying stances on cryptocurrency.
• Liquidity and Volume: Opt for an exchange with high liquidity and trading volume. This ensures that you can easily buy or sell large amounts of cryptocurrency without significantly impacting the market price.
• Customer Support: Choose an exchange that offers responsive and reliable customer support. As a business, you may require prompt assistance if any issues arise, and a dedicated support team can help resolve problems efficiently.
• Additional Services: Some exchanges provide additional services like staking, NFT trading, or crypto lending. Consider your business's specific needs and explore exchanges that offer a range of services to support your crypto endeavours.

Remember to conduct thorough research, compare multiple exchanges, and prioritize your business requirements when making your decision.

Frequently asked questions