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How does accepting crypto payments work?
Cryptocurrencies are currencies that only exist in digital form and are transacted over computer networks. They can potentially be used for a variety of transactions, such as peer-to-peer (P2P), for goods, and for work.
Whether someone is using cryptocurrencies like Bitcoin or stablecoins, it’s important to understand the ins and outs of receiving crypto, as well as the potential risks and implications when doing so. This article explores the process of crypto transactions and factors to consider before getting started.
Setting up a crypto wallet
A crypto wallet is normally needed to receive cryptocurrency. A crypto wallet is a digital wallet that can be used to securely store, buy, sell, exchange, and manage cryptocurrency in one place.
There are different types of crypto wallets. For example, a hot wallet is connected to the internet and may be used to quickly spend or transfer cryptocurrency, and a cold wallet — or hardware wallet — is not connected to the internet and is used to store private keys offline.
It's important to research different crypto wallets and types to find a secure and relevant option for one’s needs. Each may come with different potential protections, benefits, risks, and capabilities.
Receiving crypto
There are different ways a person can choose to receive crypto. Here are some examples:
- Peer-to-peer. P2P crypto transactions are usually made directly between two people without intermediary parties moderating the transactions.
- Cryptocurrency gateways. People may use cryptocurrency gateways or exchanges to accept cryptocurrency as well as convert crypto into fiat currency. Instead of trading directly from personal wallet to personal wallet, these gateways can help securely facilitate transactions.
What to consider before receiving crypto
There are potential implications of receiving crypto, including laws and tax regulations.
Before receiving crypto, individuals should consider the following:
Crypto volatility
Crypto volatility can be a risk factor. Crypto is considered volatile because its value can fluctuate frequently. So if someone receives crypto on a certain date, their currency could be worth significantly less — or more — the next day.
While some cryptocurrencies — such as stablecoins — are backed by physical assets, others are not. This means their value changes based on demand in the market. Many cryptocurrencies are also decentralized and therefore aren't overseen by a central authority, so their values may be unstable.
Conversion fees
When converting crypto to a fiat currency, or vice versa, there may be fees that apply. This can change the amount someone receives, so it’s important to always review terms and potential fees.
IRS guidelines on crypto taxes
The IRS considers cryptocurrencies to be digital assets or property, so there may be tax implications of owning crypto. This may mean that crypto transactions have to be tracked and reported on tax returns. Consult IRS guidelines here.
Additional tax implications
Cryptocurrency may be subject to additional taxes, including income tax, goods and services tax, and capital gains tax. Crypto taxation may depend on what, how, and why the cryptocurrency was received. For example, if an employee receives cryptocurrency compensation, they may have to report it as taxable income.
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