Crypto Commerce: From Market Volatility to Accounting and Tax Implications

Key takeaways for ecommerce brands:

1. Cryptocurrency adoption in ecommerce is growing significantly, driven by benefits like lower transaction fees, efficient cross-border payments, and enhanced customer privacy.

2. While accepting crypto payments can provide significant advantages, it also introduces new accounting and tax considerations, which can be challenging to manage in-house. 

3. DTC brands incorporating cryptocurrency payments are increasingly partnering with specialized bookkeeping services to manage the complex tax and accounting requirements, ensuring compliance while taking advantage of digital currency payments' benefits.

Tariffs and Crypto- a tale of two cities

Two related events – with implications for DTC brands – rattled the markets on the first weekend of February. First, U.S. President Donald Trump signed three executive orders imposing 25% tariffs on Mexican and most Canadian imports (later postponed by one month) and 10% on goods from China. Then, cryptocurrency prices plummeted, with some well-known coins taking big hits. 

Bitcoin, the world’s most popular cryptocurrency, went down 6.2%, hitting a three-week low. Ether lost nearly 25% in value, marking its biggest three-day loss since November 2022. Trump’s own meme coin, $TRUMP, dropped 15%. All in all, almost a quarter of the 100 largest cryptocurrencies have lost 20% or more in value over that weekend. It is worth noting that crypto regained some of its value, after the tariffs were delayed.

Analysts quickly linked the drops in crypto prices to Trump's tariffs and the escalating trade war. “Crypto is fundamentally about freedom to make and conduct trades, which runs counter to the global political narrative of the last week,” said James Davies, CEO and Co-Founder of trading platform Crypto Valley Exchange. “As a community, we are pro free trade. When that is being restricted, many investors are risk-off in terms of their holdings.”

Breaking Down the Benefits of Cryptocurrency Payments

The integration of cryptocurrencies into the retail and ecommerce industry has been an emerging trend in recent years. As of February 2024, 37% of ecommerce brands in the U.S. accept cryptocurrency payments – a 10% increase within two years. With good reason, too, as cryptocurrency payments provide significant advantages to both businesses and consumers. 

Key advantages include: 

• Cryptocurrencies offer lower transaction fees compared to traditional fiat currency transactions, appealing to businesses that are looking to cut costs. 

• The decentralised nature of cryptocurrencies eliminates third-party intermediaries from the payment process, resulting in more efficient cross-border payments.

• Many customers prefer cryptocurrency payments, which provide an added layer of security and anonymity, since they don’t require personal information like credit card details or ID verification.

• Collaborations between ecommerce platforms and crypto payment processors are increasing, enabling brands to integrate cryptocurrency payments into their online stores.

With Trump's return to the White House, the expectation was that crypto's value and influence would only grow. After all, in 2024, the combined value of all digital currencies jumped from $1.6 trillion to $3.29 trillion – and the biggest gains were seen after Trump won the election following a campaign in which he pledged to make the U.S. “the crypto capital of the planet.” 

However, after a strong start – between the election in early November and Jan. 20, Bitcoin went up 40% – came the tariffs-related crash (and the uptick after the tariffs were postponed). Despite the latest setback, crypto experts remain optimistic. In the long term, said Paul Howard, Senior Director at crypto market-maker Wincentin, “The organic growth we anticipate, in part due to the friendlier U.S. administration, will likely outweigh the short-term volatility and macroeconomic (tariffs) news.”

Accounting Essentials of Cryptocurrency Transactions

Crypto's growth has fueled the wider adoption of payments in digital currencies among ecommerce brands. Shopify accelerated this trend in 2020 by allowing sellers to accept cryptocurrencies as a payment method. As a Shopify seller, you can enable one or more of the digital payment methods like: 

• Crypto.com 
• BitPa
• DePay 
• OpenNode 
• Strike
• Bit2Me Commerce
• IBEX Pay

If you decide to accept cryptocurrencies as a payment method, bear in mind that they are not treated the same as credit card payments when it comes to your financials. That's because cryptocurrencies aren't considered currency. For accounting purposes, they are a type of property and should be treated in your books as a capital asset rather than as cash. 

Here's a simple example to illustrate this: Say you sold a product for $1,000 on January 1. The customer pays you one Bitcoin for this product. At this point, record an income of $1,000 in your P&L and a crypto asset of $1,000 in your balance sheet (instead of cash). Your amount of income establishes your cost basis in the coin. 

On February 1, one Bitcoin is worth $1,500, and you decide to sell your coin. Record capital gains of $500 for the sale of the crypto asset ($1,500 minus $1,000 of your cost basis). The same also applies if, instead of selling your Bitcoin for $1,500, you use it to pay for $1,500 worth of inventory or marketing expenses.

Accepting cryptocurrencies also has tax implications. The IRS considers crypto as ‘virtual currency’, which is treated as property for tax purposes. It basically means that whenever you dispose of a digital coin (by using it to purchase something, selling it, or trading it for another type of crypto), it results in a capital gain or loss for your business and should be reported on Form 8949 and filed with your tax return. 

Not all crypto transactions are taxable, though. Buying cryptocurrency with cash is not taxable, and neither is transferring units of a particular cryptocurrency between wallets you own. There are also some exceptions for gifting and donating cryptocurrencies, which may not be taxable either. 

Balancing Opportunity and Complexity: The Role of Specialized Ecommerce Bookkeeping Software

The rise of cryptocurrencies in the ecommerce space presents both opportunities and complexities for DTC brands. While accepting crypto payments can reduce transaction fees and add a layer of security and anonymity, it also introduces new accounting and tax considerations, which can be challenging to manage in-house. 

This is why many forward-thinking DTC brands are turning to specialized ecommerce bookkeeping services like Finaloop, which ensure accurate tracking of cryptocurrency transactions and proper tax compliance. With expert support handling these complexities, brands can confidently embrace cryptocurrency payments while maintaining accurate ecommerce accounting and meeting all regulatory requirements.