Billionaire investor Warren Buffett claimed five years ago that he would never invest in cryptocurrencies, predicting that the digital currency would come to a bad end. His Berkshire Hathaway partner Charlie Munger concurred, arguing that public interest was buoyed by the fact crypto sounded “vaguely modern”. “I’m not excited,” Munger declared.
PayPal co-founder Peter Thiel loudly argued another side of the debate in 2022 – claiming that Buffett, BlackRock Chair and CEO Larry Fink, and JP Morgan CEO Jamie Dimon are part of a ‘gerontocracy’ that holds back cryptocurrency. Thiel then went on to throw the remainder of his credibility under the bus when he referred to central banks as “bankrupt” and called ESG a “hate factory”.
Who’s right? Based on the above it isn’t going to be Thiel. But realistically, crypto isn’t going away today. So what does it mean for your SME clients? Are they already asking if they should accept payments in non-fiat currency such as crypto and NFTs?
Digital representations of value
First, a refresher on how cryptocurrencies work.
The Reserve Bank describes cryptocurrencies as “a type of digital currency that allows people to make payments directly to each other through an online system”. It is stored in a unique digital wallet that has its own code (key) to authorise transactions. Wallets can also be kept offline (on hardware) for extra security.
Last Week Tonight host, British comic John Oliver, provided a more accessible definition back in 2018: “Everything you don’t understand about money combined with everything you don’t understand about computers”.
The rise of these digital currencies, Oliver explained, is based solely on perceptions of value that are driven by cultural currency. “Many people are buying coins for no reason other than other people are buying them,” he said, capturing one of the greatest risks of cryptocurrencies: instability.
John Oliver’s 2018 Last Week Tonight cryptocurrency episode. Oliver this month aired another episode discussing cryptocurrencies.
Stability risk has not receded in the five years since this episode aired, despite governments speaking about efforts at regulating the risk away. And that volatility is not the only risk – cryptocurrency is still speculative and SMEs may dive in without all the information needed to make the best decisions about very real investment risks.
Cryptocurrency trading in practice
In a SME business scenario, the customer uses a cryptocurrency platform to send instructions to transfer cryptocurrency to the SME. Anyone using the network can view the message (which is one part of the appeal of the blockchain – it’s hard to forge changes). Miners then group that transaction with other recently sent transactions into a block, and information from that block is transformed into a cryptographic code. Miners compete to find the code and once solved, the block is added to the blockchain, the transaction is confirmed and SME receives the payment.
One form of cryptocurrency is non-fungible tokens (NFTs). Whereas currencies such as Bitcoin are identical units that can be replicated indefinitely, NFTs are completely unique and can be anything that can be digitalised – a piece of art, music, even a tweet. The highest price paid for an NFT so far is US$91.8m.
Cryptocurrencies have no intrinsic value; their worth depends completely on demand and is not regulated by governmental or global authorities – hence, the instability. The Reserve Bank is researching potential use cases and the economic benefits of creating a central bank digital currency in Australia to try to provide some protection for cryptocurrency users.
SMEs need to prepare
More than 25% of Australians either now own or have owned cryptocurrency, although the number of businesses that accept it as payment is still relatively low. Interest tends to be more from an investment perspective, rather than as a currency to purchase goods and services.
Still, Brad Seeto, Director and Founder of Bramelle Partners, Exclusive IR advisor for Crypto and Digital Asset Advisory in Australia, says that businesses could lose out on any potential new clients if they aren’t prepared to accept crypto payments.
“Certainly, small businesses should try to provide as many payment options as possible including crypto. The more options you have, then the more potential customers you can attract. What’s just as important as the number of payment options is the ease in how to pay you,” he says.
“You want to make the interfaces and the methods of payment easy to use, otherwise people just won’t use them. There are a number of companies that can help small businesses accept crypto payments similar to a credit card merchant facility.”
Seeto does offer a warning, however, that illustrates one major point of difference between cryptocurrencies and fiat – stability.
“If an SME were to accept crypto as payment, we would recommend only accepting the major cryptocurrencies.”
Crypto is classed as property, not currency
Additional tax considerations mainly relate to the SME retaining crypto – as property, it carries value in relation to fiat currency, and that value can change over time.
“The SME is receiving crypto instead of fiat currency, so they are assessed on the value of the crypto they receive. So if they sell a good for AU$100 they still receive AU$100 but in crypto, nothing changes from a tax point of view on the initial transaction as the face value of the transaction is still AU$100,” Seeto says.
“Now if they convert the crypto at that time to AU$100 then this would be no difference if they received AU$100 in fiat. If they retain the crypto though, there is another taxing point at the time they sell the crypto and receive fiat. The SME would have a capital gain or loss based on the change in value from the date they received the crypto to the date they sold.”
If an SME made a sale of AU$100 in fiat, then invested those funds in crypto or shares, there would be a subsequent gain or loss on the sale of the crypto or shares, which would be taxable.
“Basically the SME is receiving another asset instead of cash and that asset will have a taxing point when it is eventually sold,” Seeto says. Whether the crypto is on the revenue account or capital account depends if the SME is a trader or investor.
The ATO uses a crypto asset data-matching program to match tax returns with crypto asset transactions and accounts from designated service providers – irrespective of how a business acquires and uses crypto assets, it must record each asset and transaction for tax purposes.
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