Unless you have been living in a bubble in the financial world, you definitely have heard the word ‘Bitcoin’ thrown around a few times. While Bitcoin is still in its infancy, it is continuing to gain momentum, market share and most of all, trust. As Bitcoin gains mainstream acceptance, financial professionals such as yourself need to, at minimum, have a working idea of just what Bitcoin is and how it can help grow your practice.
What is Bitcoin?
You probably already understand that Bitcoin is a digital currency, or cryptocurrency, but most people do not really understand more than that. In short, Bitcoin is a currency that eliminates all middlemen, allowing you to send money to anyone anonymously without any transaction fees. This means you can seamlessly send money to a person in China without having to work with a currency exchange or pay any money transfer fees. As you can see, this concept is a very attractive option for people throughout the world, especially those who are looking to do business internationally.
Future of Bitcoin
The future of Bitcoin is still very uncertain with it being such a new currency and not being owned by the majority of people in the world. In fact, only about 2.5 million people own Bitcoin, meaning that .03% of the world’s population know how it works. This bodes well for the future of Bitcoin, but not in its current situation.
One major problem that is plaguing Bitcoin, and will continue indefinitely, is that it is extremely unstable. Just in 2017 alone, the price of a single Bitcoin went from just below $1,000 in January to a high of over $7,000 in November. While it was somewhat steady from 2014 to 2016, the latest surge shows the volatility of the currency. When a currency is not stable, people do not want to spend it due to the possibility of missing out of making a large return on their investment. If it trends downwards, vendors will not want to accept it for goods and services since they would be losing money on it. So, the massive growth and increase is actually a bit of a curse for the future of Bitcoin as a viable currency.
Why Should You Care?
Many financial professionals have shunned the news of the success of Bitcoin as just another fad. They think it is another internet bubble that will burst very soon, leaving behind millions of scorned users yet again. While this is a fair opinion, it is not advantageous to your business to ignore the increasing number of investors in Bitcoin. While Bitcoin may eventually be a big bust, there are hundreds of other cryptocurrencies currently on the market and even more being developed to compete with Bitcoin. In fact, Bitcoin’s market cap currently sits at over $100 billion, and it is steadily increasing. For comparison, Wal-Mart currently has a market cap of just below $300 billion.
Even more encouraging is that Bitcoin is opening up the investment world to a whole new group of people that normally do not invest. The allure of Bitcoin is that anyone can purchase any number or fraction of Bitcoin, unlike stock market shares, meaning anyone can invest in the Bitcoin phenomenon. With this comes a whole new wave of potential clients to you, as most do not understand how to properly report Bitcoin gains to the IRS. Yes, Bitcoin gains are certainly taxable income, and the IRS has already determined that Bitcoin is property, not a currency.
Also, while the majority of people who have Bitcoins purchased them as an investment, there are also people who ‘mine’ Bitcoins. Mining is the process of verifying the transactions that users make, and this is done by using the Internet. Miners use computers to set up their mining systems, and when they are able to help verify transactions, they get a small monetary reward.
Mining income has been defined as self-employment income by the IRS. This means that all miners need to report their gains on a Schedule C if they are a sole proprietor, or on the appropriate corporate tax form if they are incorporated. Also, this means they are able to deduct expenses for mining the coins, such as computers, processors, electricity to run the computer and any other expenses related to mining. Education is key here for miners, as again, they are new to reporting business activity.
Reaching a new generation of clients is essential if you want to grow your practice for the future. Adapting your services to what the market demands is what all successful businesses do, and if you do not take Bitcoin seriously, you may be left out an emerging market. Financial professionals such as yourself do not need to be experts in all things Bitcoin, but you need to understand how it works and how you tax it. Once you get a good working knowledge, you will be able to offer a valuable service to a new clientele that is still an under-served market.
Bryan Shearer is an accountant based out of Hanover, PA. Bryan has his own accounting practice in which he specializes in small business consulting and taxation, among many other services. He loves to stay involved in emerging tax trends and share his thoughts on how they translate to the business world. You can find him at https://bryanshearer.accountant