A gold bitcoin coin

Digital currencies, unlike traditional fiat currencies, are not backed by any government. Because cryptocurrencies like Bitcoin are not issued by a central bank, they have become popular with some investors and consumers who see significant opportunities for growth and believe the technology behind is the future of money.

However, digital currencies raise thorny legal issues which small business owners, entrepreneurs, and investors must consider. If you hope to raise money by issuing digital currencies or use them as a medium of exchange, then you should reach out to a California startup attorney for answers to any questions that you have.

Tax Issues

Your company might choose to invest in digital currencies or pay employees using them. According to the IRS, digital currencies are property for tax purposes, so you will need to remember the following:

  • If you pay an employee using Bitcoin or another digital currency, you must report the amounts on the W-2 form and withhold taxes.
  • You will also have to abide by reporting requirements if you use digital currencies to pay for goods or services—just as you would if you used any other property.
  • You might need to report gains or losses on the sale of digital currencies if they are a capital asset.

Advantages and Disadvantages of Using Digital Currencies

If you are considering using or accepting digital currencies, you need to think through the pros and cons carefully. For example, digital currencies (unlike credit cards) do not charge a transaction fee. This can make accepting Bitcoin and other virtual currencies a cheaper way of doing business.

Also, consumers can use digital currencies anonymously. This might be good or bad for your business. On the positive side, some consumers might be embarrassed to buy your products, and accepting Bitcoin could bring these consumers out of hiding. On the negative side, you need to be confident consumers are not buying your goods for an illegal purpose. If they are, you could open yourself up to liability.

Digital currencies are also not insured—another potential negative. The FDIC insures money in a bank in case the bank goes bankrupt. Nothing insures you against the digital currency company going belly up, which means you could find yourself losing a lot of money.

Furthermore, the law surrounding digital currencies is always evolving. Over the next several years, we could see more court cases involving whether various laws against counterfeit currency, like the Stamps Payment Act, will ultimately result in Bitcoin and other currencies being made illegal. If you are risk-averse, then you might not want your business to get too involved with digital currencies until the legal landscape becomes clearer.

Creating Your Own Digital Currency

Increasingly, startups are looking to initial coin offerings (ICOs) to raise capital. However, according to the Securities and Exchange Commission, many ICOs qualify as securities and will need to be registered with the SEC. As the SEC reminds businesses, calling a coin a “token” or using some other label does not prevent it from operating as a security. If you hope to use an ICO, then you need a California startup lawyer to walk you through every step of the process.

Reach Out to a California Startup Lawyer Today

Kalia Law stays on the cutting edge of business and technology. If you have questions about digital currencies and ICOs, please don’t hesitate to call 650-701-7617 or submit an online message.

- Claire Kalia

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