Should Your Company Invest In Bitcoin?

Investing in Bitcoin is a hot topic for companies. The cryptocurrency has become increasingly popular with businesses, with firms like MicroStrategy, Tesla and Coinbase purchasing billions of dollars' worth of Bitcoin. The conversation about whether companies should invest in Bitcoin has gained momentum, with some believing in the decentralised asset and wanting to support the growth of digital currency. Bitcoin is also seen as a way to diversify portfolios and hedge against inflation. However, it's important to remember that investing in Bitcoin is a high-risk venture and companies should be prepared to lose money.

Should my company invest in bitcoin?

Investing in Bitcoin can be a complex process for companies, with many factors to consider. Here are some key points to help you decide if your company should invest in Bitcoin:

Benefits of Investing in Bitcoin

The decision to invest in Bitcoin has become more appealing to companies due to its potential benefits. One of the primary advantages is Bitcoin's function as a store of value, similar to "digital gold." Its finite supply and decentralised nature make it a valuable asset, especially during financial crises when governments tend to print more money, leading to a reduction in the value of fiat currencies. Additionally, Bitcoin offers a secure and efficient way to facilitate international transactions, reducing transaction fees and settlement times compared to traditional wire transfers.

Furthermore, the increasing popularity of digital currencies has led to the development of military-grade security options for storing Bitcoin, such as hardware wallets, providing safer investment opportunities. The demand for simple cross-border payments and secure currencies has also caught the attention of traditional financial institutions like Visa and MasterCard, who are exploring cryptocurrency services.

Risks and Considerations

While investing in Bitcoin can provide potential gains, it is essential to recognise the associated risks. Bitcoin and other cryptocurrencies are highly volatile, and their values can fluctuate significantly based on various factors, including tweets from influential individuals. Additionally, the complexity of accounting and tax considerations for digital currencies can be challenging. Companies need to be aware of the varying tax rules and regulations across different jurisdictions, ensuring proper reporting and compliance.

Another critical aspect to consider is the potential impact on the company's reputation and investor relations. Investing in Bitcoin may be viewed negatively by customers or investors, leading to reputational risks. Therefore, it is crucial to communicate the decision to invest in Bitcoin effectively and maintain transparency.

Steps to Invest in Bitcoin

If your company decides to invest in Bitcoin, there are several steps to follow:

• Sign up for a Crypto Exchange Corporate Account: Choose a cryptocurrency exchange that offers dedicated corporate accounts, such as Gemini, Kraken, Coinbase, or River. This step is crucial to comply with legal requirements and avoid tax complications.
• Verify Your Business Account: Provide the necessary business information, including company registration documents, to verify your account. This process can be time-consuming but is essential for buying and selling crypto.
• Transfer Funds to Your Trading Account: Transfer funds from your corporate bank account to the crypto exchange. Ensure that your bank allows transactions with crypto exchanges, as some financial institutions block such transfers.
• Place Your Order: Decide whether to buy Bitcoin at the current market price (market order) or specify a desired price (limit order). Consider the pros and cons of each option, including convenience, cost, and control over the purchase price.
• Store Your Bitcoin Securely: You have two main options for storing your Bitcoin: third-party custody with the exchange or self-custody in your own Bitcoin wallet. Assess the security measures and insurance policies of the crypto exchange before making a decision. For self-custody, consider using a hardware wallet for added security.

The decision to invest in Bitcoin depends on various factors, including the company's risk tolerance, financial goals, and regulatory environment. While Bitcoin offers potential benefits, it is essential to carefully consider the risks and complexities involved. Conduct thorough research, consult with experts, and ensure compliance with legal and tax requirements before making any investment decisions.

How to buy bitcoin as a company?

Investing in Bitcoin as a company is a complex process that requires careful consideration and research. Here is a step-by-step guide on how to buy Bitcoin as a company:

Step 1: Setting Up a Corporate Crypto Wallet

The first step is to create a crypto wallet for your business. This wallet will hold your Bitcoin, Ethereum, or other cryptocurrencies and needs to be secure and reliable. There are many types of crypto wallets available, such as online hot wallets and offline cold wallets. Online wallets are typically apps on devices such as computers or phones, while offline wallets can be hardware wallets or paper wallets. It is essential to choose a wallet that suits your business needs and security requirements.

Step 2: Choosing a Crypto Exchange or Provider

Select a reputable cryptocurrency exchange or service provider that offers dedicated corporate accounts and complies with regulatory standards. Examples of popular exchanges include Gemini, Kraken, Coinbase, River, and Binance. Consider factors such as security, fees, available cryptocurrencies, user-friendliness, and customer support when making your decision.

Step 3: Understanding Compliance and Taxation

Familiarize yourself with the legal and tax implications of holding and transacting in Bitcoin in your jurisdiction. The tax treatment of cryptocurrencies can vary by location, and it is essential to understand the rules to avoid any problems with your tax return. In some cases, buying Bitcoin may not be a taxable event, but selling or disposing of Bitcoin may trigger capital gains tax or other tax consequences. Consult with legal and financial experts to ensure compliance with the relevant laws and regulations.

Step 4: Sign Up for a Corporate Account

Once you have chosen a crypto exchange, sign up for a corporate account. Do not use a personal account for business transactions, as this can have ramifications in terms of tax and may complicate your tax declaration. Provide the necessary verification documents, such as personal details of the company director and business incorporation proof.

Step 5: Transfer Funds to Your Trading Account

After your corporate account has been set up and verified, you can transfer funds from your corporate bank account to the exchange. Most exchanges accept deposits via bank transfer, credit card, or debit card. However, some traditional financial institutions may block transactions with cryptocurrency exchanges, so it is essential to check your bank's policy beforehand.

Step 6: Place Your Order

Once the funds have been transferred to the exchange, you can place your order to buy Bitcoin. There are two common types of orders: market orders and limit orders. A market order allows you to buy Bitcoin at the current market price, while a limit order allows you to specify the price you are willing to pay. Choose the order type that aligns with your investment strategy and financial objectives.

Step 7: Store Your Bitcoin Securely

After purchasing Bitcoin, you need to decide how to store it securely. You can choose to store your Bitcoin in a third-party custody solution provided by the exchange or opt for self-custody by withdrawing it to your own Bitcoin wallet. If you choose self-custody, consider using a hardware wallet, which is a removable piece of hardware that keeps your private keys offline and secure.

By following these steps, your company can safely and securely invest in Bitcoin. Remember that investing in cryptocurrencies carries risks, and it is essential to do thorough research and understand the market, regulatory, and tax environment before making any investment decisions.

Bitcoin as a store of value

Bitcoin has been described as "digital gold", owing to its decentralised nature, scarcity, and global accessibility. As a store of value, Bitcoin has some advantages over gold. Both are scarce, but Bitcoin is not subject to physical wear and tear or degradation, and it is much easier to transport and store. Bitcoin is also highly divisible, and transactions are easily verifiable.

However, Bitcoin has also suffered from high volatility. In 2014, it lost 58% of its value, and in 2018, it dropped by 73%. From its peak in November 2021 to its lowest point in November 2022, Bitcoin lost over 75% of its value. This volatility makes it difficult to imagine that Bitcoin will become a reliable store of value or medium of exchange.

Nevertheless, Bitcoin's value has increased significantly over time. With an annualised return of 230% over the last decade, it performed 10 times better than the Nasdaq 100. This has led to more and more people buying Bitcoin with the intention of holding it for a medium-to-long period.

Bitcoin's value is also underpinned by its decentralised nature, which makes it theoretically difficult for any single entity to control or censor transactions. Its scarcity is another factor in its favour as a store of value. The supply of Bitcoin is capped at 21 million coins, and it is hard to mine.

Bitcoin's liquidity and utility have also improved exponentially in recent years. More countries and businesses are accepting Bitcoin as legal tender, and global crypto ownership reached 580 million by the end of 2023.

Overall, Bitcoin has the potential to be a store of value, but it is still a high-risk investment.

How to store bitcoin safely?

Storing Bitcoin safely is a crucial aspect of owning cryptocurrency. Here are some detailed instructions and best practices to ensure the secure storage of your company's Bitcoin:

• Use a Hardware Wallet: A hardware wallet is a physical device, similar to a USB drive, that stores your private keys offline, keeping them safe from online threats. It is considered the gold standard for long-term crypto storage and offers superior security for large amounts of Bitcoin. Always purchase hardware wallets directly from the manufacturer to avoid tampered devices.
• Cold Wallets: Cold wallets are a type of storage that holds your Bitcoin offline, protecting it from online attacks and unauthorised access. While they may be less convenient for quick transactions, cold wallets are ideal for long-term storage and enhanced security. Examples include hardware wallets and paper wallets.
• Hot Wallets: Hot wallets are software-based and offer convenient, quick access to your Bitcoin for everyday transactions. However, they are connected to the internet, making them vulnerable to cyber-attacks and hacking attempts. Examples include mobile wallets and exchange wallets.
• Custodial Wallets: These wallets involve a third party, such as an exchange, managing your private keys. While they offer convenience, they come with the risk of hacks and theft.
• Non-Custodial Wallets: Non-custodial wallets give you full ownership and control of your private keys. This option provides more security but requires you to take responsibility for storing and safeguarding your keys.
• Backup Your Wallet: It is essential to back up your Bitcoin wallet regularly. Use multiple secure locations, such as USB drives, CDs, or other removable devices, to store your backups. Additionally, use strong passwords and encryption to protect your backup files.
• Use Strong Passwords and Two-Factor Authentication: Implement strong, unique passwords for your wallets and exchange accounts. Enable two-factor authentication to add an extra layer of security, making it harder for potential hackers to access your accounts even if they have your password.
• Regularly Update Your Software: Keep your wallet software and associated applications up to date. Regular updates ensure that security patches are applied, enhancing the protection of your Bitcoin.
• Educate Yourself: Continuously educate yourself about security practices and stay informed about the latest threats in the cryptocurrency landscape. This knowledge will help you make informed decisions to safeguard your investments.
• Consider a Blend of Hot and Cold Wallets: Depending on your needs, you may benefit from using a combination of hot and cold wallets. For example, you could use a hot wallet for everyday transactions and quick access to a small portion of your Bitcoin, while the majority of your holdings are stored securely in a cold wallet.

Remember, there is no one-size-fits-all solution for storing Bitcoin. The best approach depends on your company's specific needs, the amount of Bitcoin you hold, and how frequently you need to access or use it. Always prioritise security, especially when dealing with significant amounts or long-term investments.

What are the tax implications of holding bitcoin as a company?

The tax implications of holding bitcoin vary depending on the jurisdiction of the company in question. Here is a summary of the tax implications for companies in the US, Germany, and the UK.

United States

In the US, simply purchasing Bitcoin for USD or another fiat currency is not a taxable event. However, when a company sells Bitcoin for USD or another fiat currency, it is a taxable event, and the company will be liable for capital gains tax. The amount of tax liability depends on the amount of gain or loss recognised. A capital gain occurs when a company sells Bitcoin for more than it paid to acquire it, and a loss is recognised when the cost basis (the amount spent in USD plus any fees and other costs) exceeds the selling price.

Corporations can offset gains with losses for tax purposes. Net capital gains are added to the corporation's ordinary income and taxed at ordinary rates. If total capital losses exceed total capital gains, those losses cannot be deducted in the current year but can be carried back up to three years and then forward for a period of five years to offset capital gains.

Sales of cryptocurrencies should be reported on a company's tax return using Schedule D and Form 8949.

Germany

In Germany, there is no concept of a taxable event for business assets. A German business must reflect every transaction (both buys and sells) in its accounting. The profit and loss are then calculated at the end of the year based on the overall properties of the company in the balance sheet.

For cryptocurrencies to be included in a balance sheet, they must represent an asset due to the principle of completeness from § 246 para. 1 sentence 1 HGB. As there is no currency or securities property in accordance with § 2 Paragraph 1 of the German Securities Trading Act (WpHG), the only remaining disclosure option in the current assets is "other assets".

The tax liability depends on the value of the assets in the balance sheet. All cryptocurrencies are generally accounted for according to the strict lowest value principle, meaning that the lowest value of three possible values (acquisition or production costs, stock exchange or market price, and the value to be attributed on the balance sheet date) is always applied to current assets.

United Kingdom

In the UK, a company pays corporation tax on profits from doing business, investment income and gains, and chargeable gains on the disposal of assets. If a company held cryptocurrency as an investment rather than as part of its trade, the disposal of the cryptocurrency will give rise to a chargeable gain/loss, and the company will pay corporation tax (19% for the 2019-20 tax year) rather than capital gains tax.

A 'disposal' is a broad concept and includes exchanging cryptocurrency for another cryptocurrency token, using cryptocurrency to pay for goods or services, and gifting or donating cryptocurrency.

The calculation of a company's taxable profits must be undertaken in the company's functional currency (generally pound sterling for UK-based companies), and companies are subject to Corporation Tax on their profits and gains. Therefore, the gain or profit from cryptocurrency activities should be reflected in the financial statements of the business.

General Considerations

When holding bitcoin as a company, it is important to be aware of the volatility of the cryptocurrency market, which could put a dent in the company's balance sheet. Additionally, there may be regulatory risks and reputational risks if the company's investment in bitcoin is viewed negatively by customers or investors.

It is also crucial to keep careful records of transactions and to understand the specific tax rules and regulations that apply to cryptocurrency transactions in the relevant jurisdiction.

Frequently asked questions