Cryptocurrency payments are becoming more and more popular. Since 2017, using Bitcoin as a form of payment for goods or services rose from 8% to 23%. While Bitcoin is the most popular cryptocurrency, many others, including Ethereum, Litecoin, and Bitcoin Cash, have also been used for payments.
But, if you’re new to the crypto world, you might be wondering how getting paid in cryptocurrency works. Here are a few things to consider if you’re considering getting paid in Bitcoin or another cryptocurrency.
Cryptocurrency Volatility
One of the first things to consider is that cryptocurrencies are volatile. The prices of Bitcoin and other cryptocurrencies can fluctuate greatly, sometimes even in a single day. This means that if you’re paid in cryptocurrency, the value of your payment could change by the time you receive it.
For example, let’s say you’re paid 1 BTC on Monday. On Tuesday, the price of Bitcoin increases, and your 1 BTC is worth $10,000. You then decide to spend some of your Bitcoin on Wednesday. But, by the time you make your purchase, the price of Bitcoin has dropped, and your 1 BTC is only worth $9,000. So, you’ve just lost $1,000 in value.
Of course, this works both ways. Let’s say the price of Bitcoin decreases after you’re paid on Monday. By Wednesday, when you make a purchase, the price of Bitcoin has increased, and your 1 BTC is worth $11,000. So, you’ve just made an extra $1,000.
While this volatility can be a risk, it can also be seen as an opportunity. If you believe the price of Bitcoin or another cryptocurrency will increase in the future, holding onto your payments could lead to a big payoff down the road.
On the other hand, if you need to spend your cryptocurrency right away, you might want to convert it into fiat currency (i.e., government-backed currency like USD) so that you don’t have to worry about fluctuations in value. Hence, it is always good practice to use a Bitcoin escrow service when dealing with cryptocurrency.
Cryptocurrency Fees
Another thing to consider is cryptocurrency transaction fees. You have to pay a transaction fee when you purchase with Bitcoin or another cryptocurrency. This fee goes to the miners who validate and process the transaction on the blockchain.
Transaction fees can vary depending on the cryptocurrency you’re using and the size of the transaction. For example, at the time of writing, the average Bitcoin transaction fee is around $10. So, if you’re paid 1 BTC, it might cost you $10 just to send it to your wallet. On the other hand, ethereum fees are currently much lower, at around $0.30 per transaction.
It’s also worth noting that some exchanges charge higher fees for specific cryptocurrencies. For example, Coinbase charges a 1.49% fee for buying or selling Bitcoin, while they only charge a 0.99% fee for Ethereum transactions.
Hence, before you accept cryptocurrency payments, it’s essential to research the fees associated with the currency you’re being paid in. That way, you can ensure you’re getting your payment’s total value.
Cryptocurrency Taxes
Another thing to consider is how you’ll be taxed on cryptocurrency payments. In the US, the IRS treats cryptocurrency as property, not currency. This means that you’ll have to pay capital gains taxes on any value increases when you sell or spend your cryptocurrency.
For example, let’s say you’re paid 1 BTC on Monday. However, the value of Bitcoin increases, and you decide to cash out your BTC on Wednesday. You’ve now made a capital gain of $1,000, and you’ll be subject to taxes on that gain.
Of course, you can also have a capital loss if the value of Bitcoin decreases after you’re paid. For example, let’s say the value of Bitcoin drops $500 after you’re paid 1 BTC on Monday. If you cash out your BTC on Wednesday, you’ll have a capital loss of $500.
While capital gains taxes can be a burden, they can also be used to your advantage. For example, if you have significant gains, you might be able to offset them with losses from other investments. You can also carry forward capital losses to offset gains in future years.
It’s worth noting that the IRS treats cryptocurrency differently than other asset classes. For example, stocks are subject to short-term and long-term capital gains taxes, while cryptocurrency is only subject to long-term capital gains taxes if you hold it for more than a year.
Hence, consulting with a tax professional is essential to report your cryptocurrency income and gains correctly.
Picking the Right Exchange
Finally, if you’re going to be paid in cryptocurrency, you’ll need to pick the right exchange. An exchange is an online platform that allows you to buy, sell, or trade cryptocurrencies.
When choosing an exchange, there are a few things to consider.
- First, what type of fees does the exchange charge?
- Second, what’s the selection of currencies like?
- Third, how easy is it to use the platform?
- Fourth, is the exchange reliable and safe?
- Fifth, what type of customer support does the exchange offer?
These are just a few things to consider when picking an exchange. Of course, you’ll also want to consider your needs and preferences.
For example, if you’re only dealing with Bitcoin, you might want to use a platform known for being easy to use. On the other hand, if you’re dealing with various cryptocurrencies, you’ll want to use a platform that offers a wide selection of currencies.
Conclusion
Cryptocurrency is a new and exciting technology, but it comes with its own set of risks and considerations. In this article, we’ve discussed some things to consider when getting paid in Bitcoin or other cryptocurrencies. We’ve looked at transaction fees, capital gains taxes, picking the right exchange, and more.
So, if you’re thinking about accepting cryptocurrency payments, make sure to do your research first. That way, you can ensure you’re getting the most out of your payments.