Cryptocurrencies for Comms Use: Safe or Vulnerable?

More than 4,000 alternative currencies -- cryptocurrencies -- have emerged since bitcoin's release in 2009. Since blockchains, which I wrote about in my recent No Jitter post "How Service Providers Might Use Blockchain," use cryptocurrencies for payments, I decided to look into the implications for providers, vendors, and customers of communications products and services.

Cryptocurrencies in the Communications Ecosystem

Cryptocurrency, like bitcoin, is a financial mechanism for making and receiving payments for products and services. In communications, cryptocurrencies might come into play in a variety of ways, such as:

• Payments for product or service purchase, lease, or rental
• Credits and refunds for service-level agreement shortfalls or billing errors
• Investment vehicles

In reading the Motley Fool article "9 Reasons Investing in Cryptocurrencies Is a Bad Idea," six major points against cryptocurrencies stood out for me:

1. Cryptocurrencies don't have the common fundamental metrics investors look for when attempting to assign an appropriate value to an asset.
2. Blockchain is years away from being relevant to and ready for market use.
3. The Securities and Exchange Commission (SEC) has unconditionally warned investors that it has limited oversight and can do little when fraud occurs.
4. Cryptocurrency thefts have occurred, even though blockchain is designed to be a highly secure means of transmitting and storing money.
5. Regulation related to cryptocurrency taxes has increased, as noted below.
6. Most organizations don't really understand how cryptocurrency works.

By market cap, bitcoin is the world's largest digital currency. The value of a bitcoin varies greatly, sometimes within one day (see "What is the real value of a bitcoin?" and "Meet 'Spoofy' ..." for conditions that relate to bitcoin value and bitcom manipulation). Bitcoins are commonly measured in terms of their exchange rate to the U.S. dollar and the Japanese yen, the two main currencies when exchanging bitcoins.

Federal Investigations

Cryptocurrencies are treated as digital assets, and that means there are tax implications to consider when using cryptocurrencies. For example, if a company uses cryptocurrency as an investment, a capital gains tax may apply if the value increases. Conversely, decreased value is a loss for tax purposes.

Tax authorities around the globe, including in the U.S., are developing methods to investigate and prosecute cryptocurrency tax crime and other fraudulent activity involving digital assets. In a blog post, tax attorney Steve Moskowitz, of Moskowitz LLP, presented five tips to consider when dealing with cryptocurrencies:

1. The IRS views cryptocurrency and digital currency property as taxable assets. The IRS may prosecute anyone neglecting to report cryptocurrencies on their taxes.
2. If you're paid for a product or service, you must pay income tax on the amount received.
3. Every purchase you make for products and services is a taxable event. The organization must track the details (date of transaction, amount paid, and parties involved).
4. The transfer of digital assets is a reportable transaction that requires a report of any capital gains or losses.
5. Organizations are required to report all employee or contractor payments gifts, rewards, bonuses, and withholding taxes.

You can't ignore blockchain and cryptocurrencies. Look at them closely, and determine the risk involved before you enter this environment. It could be advantageous but also create a number of headaches for your financial operations. The tax implications can be severe.