Part III
Using Bitcoin in Business
Four Disadvantages of Cloud Mining
✓✓ Lack of control: You are essentially renting computing and server
hardware from someone else, meaning you are not in control of those
assets.
✓✓ Reliance on the honesty of someone else: If your payments seem
short, there’s no real way to get to the bottom of why you are not
being paid as much as you think you should be.
✓✓ Maintenance and electricity fees passed along to you: Your cloud
mining company has to pay to maintain the equipment, and they pass
along those costs to you.
✓✓ Illegitimate or vulnerable companies: Some bitcoin cloud mining
service
companies may look legitimate, but they are not. Also, they
may get hacked, and there is little you can do about it.
In this part . . .
✓✓ Find out about selling with bitcoin, working with bitcoin
payment
processors, and accepting bitcoin in your store.
✓✓ Read all about bitcoin and taxes, regulation, and licensing.
✓✓ Secure your bitcoin investment and find out about the dangers
of double‐spending and various types of attacks.
✓✓ Mining bitcoin — all about how it works and whether it’s right
for you.
Chapter 8
Using Bitcoin in Commerce
In This Chapter
▶▶Selling with bitcoin
▶▶Looking at bitcoin payment processors
▶▶Accepting bitcoin in your store
U
nderstanding what bitcoin is and how it works and
acquiring
a little bitcoin for fun or curiosity are all well and
good . . . but when it comes down to it, we’re sure you want to find
out a little more about using it as (virtual) cold, hard currency.
This chapter discusses the best ways to use bitcoin as a tool
when selling, to substitute it for fiat currencies, and to accept and
receive payments online.
Selling Your Goods for Bitcoin
When it comes to selling goods for bitcoin, you have several
options to choose from. First and foremost, you can convince
friends and family to embrace bitcoin and sell them goods in
exchange for BTC.
But that’s not what we’re looking at in this chapter, as we’re talking
about commerce, not money from friends and family. This section
goes over the various platforms in existence to facilitate the sale
of (digital) goods in exchange for bitcoin: auction sites, using your
own online store, and benefitting from online forums.
Selling on auction sites
Selling goods for bitcoin is nearly as old as the digital currency
itself. However, it took a while before designated platforms started
coming to life in the bitcoin world. The most obvious place to sell
any product in exchange for bitcoin is an auction house or auction
website, something like eBay.
114 Part III: Using Bitcoin in Business
Very few auction websites accept bitcoin payments at the time
of writing. However, as more and more developers are exploring
the option of creating decentralized auction sites and market
places, that number is expected to increase over the next few
years. A comprehensive list of bitcoin auction sites can be found at
https://en.bitcoin.it/wiki/Trade#Auction_sites.
Over the years, various marketplaces have offered bitcoin payments
as part of their service, though not all of them have been
positive. Popular marketplaces such as Silk Road and Silk Road
2.0 — both of which have been notorious for illegal goods and
highly questionable services — showed the bitcoin world that
things needed to change if mainstream adoption is ever to be
achieved.
Nearly two years ago, the first auction site started experimenting
with bitcoin payments. Unlike eBay, this auction website is not
just about connecting buyers and sellers from all over the world.
To discourage illegal activity, auction sites come with reputation
and feedback systems, something the bitcoin world desperately
needed at that time.
Rather than using a centralized payment system such as PayPal,
as eBay does, bitcoin auction sites use BTC as a payment method.
But here is the twist: Bitcoin payments are non‐reversible, forcing
bitcoin auction sites to offer a different type of protection for both
buyers and sellers.
Holding funds in escrow (meaning a third party receives the funds
for a transaction and holds them until the buyer verifies the funds
can be sent to the seller) is a great way to protect both the buyer
and seller during a transaction. During a purchase, the buyer sends
the BTC funds to an escrow address. This ensures that the seller
has a chance to receive the full amount, rather than trusting the
buyer to have the necessary money to pay for an item. Buyers are
protected under escrow rules as well, as the escrow address holds
the funds until the buyer confirms they have received the item(s)
purchased from the auction site. Once everything has been verified
and is deemed to be as agreed upon, the buyer notifies the
escrow service to release the funds to the seller. After a transaction
has been completed — successfully or not — both parties can
leave feedback for each other.
Creating your own online store
Another way to use bitcoin in commerce is to set up your own
online store where you offer products and/or services — physical
or digital — in exchange for bitcoin.
Chapter 8: Using Bitcoin in Commerce 115
Creating an online store and accepting bitcoin payments isn’t hard
to do, because the most commonly used platforms have bitcoin
payment plugins ready to be used.
One easy way to get your feet wet is to create a WordPress website
(check out www.wordpress.org). WordPress lends itself perfectly
to various purposes, ranging from blogs to online shops
and everything in between. For online commerce, plugins such
as WooCommerce, WP E‐Commerce, and GoUrl MarketPress let
you start accepting bitcoin payments within minutes. A list of
bitcoin
payment plugins for Wordpress can be found at https://
wordpress.org/plugins/tags/accept‐bitcoin.
Besides WordPress, other popular bitcoin payments processors,
including Bitpay and Coinbase (described later in this chapter)
have e‐commerce solutions integrated into their services, which
can be linked to popular online shopping cart solutions, such as
XCart and ZenCart, among others.
You’ll need to decide whether you want to keep every transaction
in BTC or not. There is a certain risk associated with keeping funds
in bitcoin, because the bitcoin price remains quite volatile on a
daily basis. Keeping funds in BTC can mean your sitting funds can
either increase or decrease in value. And depending on what type
of goods you’re selling, and whether or not there are suppliers to
pay, it might be a good idea to convert BTC funds immediately to
your local fiat currency.
Selling on BitcoinTalk forums
This may be the easiest way of all: selling goods in exchange for
bitcoin by posting your item for sale on the BitcoinTalk forums. To
find out more about these, head over to www.bitcointalk.org.
This site has a dedicated section for buying and selling items, both
in physical and digital form. However, there are certain drawbacks
to using the forum rather than an auction site or building your
own store.
Selling an item for BTC on the BitcoinTalk forums is based on trust
ratings earned by completing previous trades with other users.
Assuming your account has 0 (zero) trust, at first it can be difficult
to find customers willing to buy your product in exchange for
a non‐reversible payment method in the form of bitcoin. Solving
that issue is not as hard as it may seem, though, because there are
plenty of people willing to escrow the transaction (see the earlier
section “Selling on auction sites” for more about escrow). The same
escrow rules as the ones for bitcoin auction sites would apply:
Buyer sends funds to the escrow, seller ships the item, and once
the buyer verifies the delivery, funds are released to the seller.
116 Part III: Using Bitcoin in Business
In theory, it sounds like both parties are protected, but there is a
catch. Pretty similar to how eBay works, the intermediary escrow
party has to make a decision based on evidence provided whenever
there is a dispute. Imagine a scenario in which you ship the
item, and the buyer claims to have only received an empty box.
The buyer has photographic material of the box when it arrived,
unopened, and then posts a picture of the box empty without the
item inside.
Unless you, as a seller, took pictures when shipping the item that
everything was packaged inside the box, there is a case for a
dispute. Having a tracking number associated with the shipment
helps, in that delivery of the package can be tracked by the escrow.
However, the final decision lies with the escrow, and as we all
know, humans are fallible.
Using an auction site or building your own online store may be the
best way to sell items for bitcoin. However, using the BitcoinTalk
forums creates a peer‐to‐peer aspect to the transaction, as there
are (usually) no third parties involved, except an escrow perhaps.
In the end, the main goal is to satisfy the customer and receive
your money in bitcoin. Pick whichever method seems best to you,
and see it through till the end.
Check out the BitcoinTalk Goods section: https://bitcointalk.
org/index.php?board=51.0.
Looking at Bitcoin Payment
Solutions
As we’ve mentioned, in contrast to credit card transactions, which
are subject to much higher fees than BTC transactions, bitcoin is
a non‐refundable payment method. That means that once a sender
sends funds from their wallet to a recipient, that transaction can’t
be reversed, and funds are gone for good.
Of course the recipient could send money back to the original
sender if need be. But a bitcoin payment cannot be cancelled
or charged back, unlike credit card transactions. The reason is
simple: Credit cards are issued by a central financial institution,
which can be called upon to request a refund. With bitcoin, there
is no central authority backing the digital currency, and users are
solely responsible for storing and sending BTC funds.
Chapter 8: Using Bitcoin in Commerce 117
There is no reason why bitcoin transactions should ever be made
subject to chargebacks either. Every bitcoin transaction is broadcasted
on the blockchain, a public ledger collecting all BTC transfers
from the past, present, and future (see Chapter 7 for more on
the blockchain). The blockchain makes it clear for everyone in the
world to see where funds from “address A” are being sent to and
for what amount.
Which brings us to another aspect of bitcoin and chargebacks that
is important to keep in mind. Whenever a customer sells bitcoin
to a customer, whether directly or through an exchange, it is key
never to use a reversible payment method. For example, if you’re
selling BTC to Jonas, and he wants to pay for it in PayPal, the deal
should never go through. The reason for that is simple: Traditional
payment methods such as PayPal (www.paypal.com), Skrill
(www.skrill.com), and credit card transactions are subject to
fraud and chargebacks.
PayPal is an especially annoying platform to use when selling
bitcoin,
for multiple reasons. First of all, PayPal doesn’t offer seller
protection when dealing with “digital goods.” Secondly, at the time
of writing, bitcoin is still viewed as a “digital good” by PayPal’s
Terms of Service. Should the buyer request a refund through
PayPal, even after receiving the bitcoins, they will get their money
back, no questions asked. The same principle applies to Skrill
payments,
even though all payments there are supposed to be
“final.” Opening a dispute by the buyer will, most likely, lead to a
refund by Skrill.
In either scenario, the seller has lost their bitcoins, because bitcoin
is a non‐refundable payment method and it can’t be charged back.
Dealing with bitcoin is the end-user’s personal responsibility —
something that should not be taken lightly. Being in full control of
personal finance at any given time is both a powerful feeling and a
big responsibility.
Bitcoin merchants, on the other hand, see the benefit of accepting
a payment method that is not subject to chargebacks. Fraud
through online payment methods is one of the biggest worries for
online retailers all around the world. Bitcoin can solve that problem
in its entirety. Additionally, accepting bitcoin can open the
door to a new and larger customer base all around the world.
Accepting bitcoin payments in either online or offline fashion has
become incredibly easy and user‐friendly these days. A variety of
services are at your disposal to integrate bitcoin payments buttons
on your website, or even provide a way to generate bitcoin QR
codes for in‐store payments. This section looks at a few of the
different
options.
118 Part III: Using Bitcoin in Business
BitPay
Perhaps one of the most famous bitcoin payment processing companies
is BitPay (www.bitpay.com). The company was one of the
very first to embrace bitcoin payment processing and is one of the
leading bitcoin payment processors in existence today.
BitPay provides a lot of benefits for both consumers and merchants
willing to work with bitcoin payments. For the consumer, there
are several options to send a bitcoin transaction through BitPay:
You can either scan the generated QR code, copy the destination
address manually, or click the in‐browser link to pay directly from
the bitcoin software installed on your computer.
Merchants, on the other hand, don’t have much to worry about
in terms of setting up BitPay integration. For website owners, a
few lines of code need to be added into preexisting shopping cart
systems — and that’s about it. Converting the prices from local
fiat currency to bitcoin is taken care of by BitPay, creating a very
smooth setup experience for merchants.
As an added benefit, BitPay — as well as all other payment processors
mentioned in this chapter — offer merchants the option of
converting every bitcoin transaction to fiat currency on‐the‐fly.
For most merchants, this is an important step, as their suppliers
will need to be paid in fiat currency as well. Keeping in mind that
bitcoin value can be quite volatile, it is a good business idea to
convert the funds as soon as possible.
Unlike credit card transactions, which take up to a week to clear
in the merchant’s bank account, bitcoin payment earnings are
received the next business day. This is a great way for merchants
to stay on top of costs and earnings as well as remove any unnecessary
friction between themselves and their supplies due to
outstanding
payments.
BitPay provides this conversion system as part of its starter package,
and everything already mentioned above comes free. Once
again, bitcoin is a far cheaper payment solution compared to any
and all other payment methods in existence today. Plus, with no
additional infrastructure to set up, no investments have to be
made in order to integrate BitPay into the checkout system.
But there is more. BitPay allows merchants to accept bitcoin payments
through mobile devices as well. Invoices can be generated
through BitPay’s mobile application, which usually results in the
generation of a QR code. These QR codes include the payment
Chapter 8: Using Bitcoin in Commerce 119
address as well as the total amount to be paid. All a customer has
to do is scan the QR code with their own bitcoin application, click
or tap Send, and the transaction is complete. A frictionless experience
for both merchants and customers alike, at no cost!
Should the need arise to upgrade the BitPay plan — for QuickBooks
POS integration or VPN access, for example — there are two paid
plans available as well. Both the Business and Enterprise plan offer
additional functionality and features for existing BitPay customers.
In the early days, the free plan will be more than sufficient for most
retailers though. For more information on BitPay price plans, see
https://bitpay.com/pricing.
Coinbase
Coinbase is another popular bitcoin payment‐processing solution.
Similar to BitPay (see the previous section), Coinbase offers most
of the same functionalities for merchants who want to start exploring
the world of bitcoin payments. Plus, Coinbase is available both
in the United States and internationally, following the same path
BitPay has taken over the years.
Regarding the free structure, Coinbase does things a bit differently
compared to its competitors. The first $1 million worth of bitcoin
transactions comes at 0 percent fee, after which a 1 percent fee
will apply. Granted, for most merchants, it will take quite some
time until they reach that sales figure, so there may be no reason
not to choose Coinbase because of that 1 percent fee after the
million‐
dollar mark.
Converting bitcoin to fiat currency with Coinbase takes between
one and three business days to complete, depending on the merchant’s
location. Payments are initiated every day, however, which
is still much faster than traditional payment methods such as
credit cards and bank transfers.
What makes Coinbase interesting is the fact that its API offers
merchants the chance to issue bitcoin refunds to the customer.
In their original state, bitcoin payments are non‐refundable, as
already mentioned, though the recipient can manually send the
money back. That same principle applies here, but in a businessesque
setting. With a few clicks, merchants can refund customer
transactions if they deem it necessary to do so.
More information on Coinbase for merchants can be found at
www.coinbase.com/merchants?locale=en.
120 Part III: Using Bitcoin in Business
Accepting Bitcoin Payments
for Your Store
Accepting bitcoin payments as a merchant or retailer takes up
very little time and comes at no additional costs in terms of
infrastructure.
Unlike traditional payment methods, bitcoin payments are far
more user‐friendly for both merchant and consumer and involve
far lower transaction fees. Plus, there is no worry about having a
large influx of cash payments, as bitcoin is not a physical payment
option.
Online stores
Online retailers have an easy job of integrating bitcoin payments
into their web stores. All it takes is a few lines of code, which are
provided by the company that will process bitcoin transactions for
you and which need to be added to a certain page. Once that part
is complete, you can start accepting bitcoin payments without a
hitch and expand your customer base on a global scale.
Most bitcoin payment processors offer e‐commerce solutions for
their customers and will even help in setting up bitcoin integration
if needed. Additionally, most of the popular e‐commerce
solutions already support bitcoin integration. The reason for this
is simple: no additional costs to work with bitcoin, while having
every chance to attract customers from all over the world. What
merchant
would refuse that offer?
If an online retailer already owns a website and a domain, as most
do, no additional infrastructure needs to be invested in. Bitcoin
payments integrate with most major e‐commerce solutions, and
there are customized solutions available as well through various
bitcoin payment processors (see the previous section).
Speaking of working with bitcoin payment processors, the beautiful
part about accepting bitcoin transactions is that most of them
will not even charge a fee for converting payments to fiat currency.
Every bitcoin payment processor offers its customers the option to
have (part of) every bitcoin transaction converted to fiat currency
on‐the‐fly in order to avoid bitcoin price volatility. The converted
funds are then deposited into the customer’s bank account within
48 hours (two business days).
Chapter 8: Using Bitcoin in Commerce 121
Once you have integrated bitcoin payments into your existing
e‐commerce solution, there is one major step left. Putting up the
famous “Bitcoin Accepted Here” logo (see Figure 8‐1) on your web
page will alert potential customers about the payment method. Not
only does this help increase bitcoin awareness on a global level,
but it may also inspire others to start exploring the option of
bitcoin payments as well.
The bitcoin checkout process for online stores is very straightforward.
All store prices — denominated in fiat currency — are
converted to their respective bitcoin value during checkout by the
bitcoin payment processor. On the payment page, customers see a
QR code they can scan with mobile devices, and a bitcoin address
to which they can manually send funds from their bitcoin software.
Once the transaction has been broadcasted to the bitcoin network,
the checkout process is complete.
Brick‐and‐mortar stores
Similar to accepting bitcoin payments online, brick‐and‐mortar
locations do not need to invest in additional hardware if they
want to accept bitcoin payments. Using a computer, smartphone,
or tablet is all that is required, plus an Internet connection. Most
locations
have a combination of devices and Internet connectivity
at their disposal, which means they can start accepting bitcoin
payments within minutes.
Just sign up with the bitcoin payment processor of your choice,
which usually provides customers with a mobile application or a
web interface to start accepting bitcoin payments. Installing the
mobile application or setting up this web interface takes a few minutes,
after which the merchant is ready for incoming payments.
Just like online payments, in‐store bitcoin payment occurs through
the generation of QR codes. Bitcoin payment processors allow
merchants to generate a QR code with their designated BTC
address and payment amount through the app or web interface.
Source: Bitcoin Wiki
(http://en.
bitcoin.it)
Figure 8-1: Bitcoin Accepted Here . . . hurrah!
122 Part III: Using Bitcoin in Business
Once the customer scans this QR code with their own bitcoin
wallet — usually on a mobile device — the payment is completed
within seconds.
As you may have guessed by now, accepting bitcoin through
online or in‐store means is very simple once the merchant gets
the hang of it. In the initial stages, in‐store payments require a
bit of tapping on the screen before a QR code is generated. This
minor learning curve is only normal when new technology arrives,
and nearly all bitcoin customers will gladly lend a helping hand if
needed.
Chapter 9
Staying on the Right
Side of Legal
In This Chapter
▶▶Coming to grips with taxation
▶▶Understanding the complex framework of regulation
▶▶Licensing, or not licensing, as the case may be
T
hings we don’t yet understand scare us, and we want to control
them: aliens, the Loch Ness Monster, lawyers, and tax
officials. Like those, bitcoin control can only be enforced up until
a certain level. Outlawing bitcoin completely would never work
simply because there is no way to monitor it properly. Despite the
blockchain’s transparency, wallet addresses remain pseudonymous,
with no name or location attached to them.
And why would anyone want to outlaw bitcoin anyway? (Actually,
check out the sidebar later in this chapter for a few ideas.)
Certain aspects of bitcoin require further investigation in order
to build a regulatory framework. Using it as currency for legal
purposes, such as buying and selling goods or services, is not illegal.
On the other hand, most central banks have warned financial
institutions and individuals about the risks associated with bitcoin,
without outlawing the use of digital currency altogether.
What worries law enforcement agencies and government officials
is the fact that bitcoin is not controlled by a central authority.
Every bitcoin user determines the future of bitcoin, without having
to bend to the will of a handful of individuals wielding the power.
Decentralization is a new breed of technology that most everyday
people fail to grasp properly, and that makes things occasionally,
shall we say, difficult for bitcoin.
124 Part III: Using Bitcoin in Business
This chapter looks at bitcoin’s legal situation in various countries
and discusses what you can do to protect yourself and what you
need to do to keep the taxman happy.
Understanding Bitcoin
and Taxation
Daniel Defoe famously wrote, “Things as certain as death and
taxes, can be more firmly believed” . . . often paraphrased as
“Nothing is certain but death and taxes.” I can help you with the
taxes element of bitcoin, but I’m afraid you’re on your own with
the death bit.
Despite certain warnings issued by governments and central banks
regarding bitcoin and its disruptive nature (see Chapter 1 for more
on that), most countries are more than happy to allow digital currency
adoption for one simple reason: taxation.
Because digital currency can be seen as an income or wage, it can
be taxed. Additionally, using bitcoin to pay for goods and services
is taxable in certain countries as well. As long as the government
can make money from this “new breed of electronic payments,”
there won’t be much opposition.
Remember that the regulatory tax landscape could change at any
time, and it is always a good idea to check with your local government
as to how bitcoin can be used, and whether or not you have
to pay taxes on bitcoin. Countries such as Brazil, Canada, Finland,
Bulgaria, and Denmark have issued taxation guidelines for bitcoin
usage, yet not all these guidelines are in effect at the time of publication.
Other countries, such as Belgium, Greece, Hong Kong,
Japan, and New Zealand have no plans to tax bitcoin and other virtual
currencies just yet.
Rest assured, though, that every individual country is looking
into bitcoin and the impact on that country’s economy. Given the
decentralized and potentially global nature of the product, it may
well be the case that broad regulations may have to be agreed
upon at a global level before some individual countries take the
plunge of determining how to regulate bitcoin as a currency, or
even to treat it as a currency at all. As a practical example, many
countries have their own specific laws to cover anti‐money laundering
and combatting the financing of terrorism (AML/CFT),
and these fall under the intergovernmental organization of the
Financial Action Task Force (FATF). It is possible that some intergovernmental
steering will be required by some nations before
Chapter 9: Staying on the Right Side of Legal 125
they begin to issue regulations, or indeed taxation guidelines for
bitcoin and other crypto-currencies within their borders. These
issues aside, the need for a sovereign treasury to increase the
amount collected in taxation may well be the pull factor that some
countries require in order to regulate and tax bitcoin and its usage.
Taxable countries
Taxation guidelines in different countries change on a regular
basis, and it is nearly impossible to provide the latest up‐to‐date
information regarding this matter.
In Europe, things are entirely dependent on the decisions made by
the European Union. In the meantime, a handful of countries have
issued their own bitcoin taxation guidelines, which may be revised
at a later date. The European Union will most likely not come to
a decision any time soon, yet the landscape could change at any
given time. Over in Asia, things are relatively quiet on the bitcoin
taxation front — only Singapore is actively taxing bitcoin as a good
or asset. For goods, a VAT or sales tax is applicable when buying
or selling goods from local businesses using bitcoin.
The list included in this section looks at some of the countries with
their own bitcoin tax laws. It was accurate at the time of writing
but may have seen various changes by the time you are reading
this book.
Australia
A Goods & Services Tax (GST) has been applicable to bitcoin
transactions worth over AUD$10,000. However, in recent times,
new regulation was proposed to treat bitcoin and other virtual currencies
as “real currencies,” which could lead to different taxation
guidelines in the near future.
Brazil
Brazil’s tax authority Receita Federal issued bitcoin taxation guidelines
as follows: Digital currencies are viewed as financial assets,
and are subject to 15 percent capital gains tax at the time of sale.
However, bitcoin sold with a value below R$35,000 will not be subject
to this taxation. Any user who holds more than R$1,000 worth
of digital currencies must declare the correct amount at the end of
the year.
Bulgaria
Bulgaria is one of the few European countries where bitcoin is taxable.
The country’s National Reserve Agency stated that the sale 126 Part III: Using Bitcoin in Business
of digital currencies is treated as income for the sale of financial
assets. As a result, a 10 percent capital gains tax is in effect in
Bulgaria. Earning trades through bitcoin or other digital currencies
are taxed on the same level as regular income and corporate
income in the country.
Canada
Canada will be taxing bitcoins no matter what, but there are two
different ways of taxing the digital currency. Bitcoin transactions
used for buying and selling goods and services fall under the
barter category, yet any profits made on commodity transactions
are classified as income or capital.
Every bitcoin transaction is reviewed on a case‐by‐case basis, and
any activities undertaken for profits lead to a taxpayer’s income
being taxed with reference to their inventory at the end of the
year. Values of goods and services obtained through barter transactions
must be included in the taxpayer’s income, assuming they
are business related.
Finland
Finland is a bit of an odd duck, as government officials imposed a
capital gains tax on bitcoin and taxed bitcoin produced by mining
as regular income. However, in 2014 bitcoin was classified as a
commodity, as it does not meet all the proper definitions of a currency.
As a result, bitcoin taxation remains confusing in Finland, so
it would be best to check with a local representative.
Germany
Germany is perhaps the most advanced country in Europe, as far
as bitcoin taxation guidelines are concerned. Any amount of bitcoin
held for longer than a year is exempt from the 25 percent capital
gains tax in effect. Bitcoin is currently considered as “private
money” in Germany.
Isle of Man
The Isle of Man, a self‐governing British crown dependency, is one
of the few locations where an intelligent regulatory framework for
digital currencies is being put in place. Exchange platforms based
here need to adhere to strong Know‐Your‐Customer and Anti‐
Money Laundering regulations and Combating the Financing of
Terrorism, and compliance is enforced by the Isle of Man’s financial
regulator, the Financial Services Authority (FSA).
Unlike most other places around the world, the Isle of Man is
actively taking the necessary steps to create a regulatory framework
for digital currencies. Bitcoin and other crypto‐currencies do Chapter 9: Staying on the Right Side of Legal 127
not fall within the scope of licensable activities by the island’s FSA,
but crypto-currency companies do need to comply with the relevant
AML/CFT laws pursuant to 2015 amendments to the Proceeds
of Crime Act 2008. Thus, a practical approach allows startups to
register without having to go through severe licensing requirements
as any self‐respecting financial service regulator would
enforce. This fosters an entrepreneurial culture on the island and
allows the crypto‐currency sector to flourish as regulations are
developed over time. It is a move that will help to legitimize bitcoin
in the long run, as the digital currency offers many advantages (as
you will no doubt have gathered from other chapters in this book).
The Netherlands
In The Netherlands, things are very straightforward where bitcoin
taxation is concerned. Bitcoin is treated like any other currency in
the country, and the same taxation guidelines apply to virtual currencies
as they would to regular currencies.
Slovenia
Slovenia decided not to tax the sale of bitcoins to exchanges or
other community members. However, bitcoin is subject to income
tax just like any regular currency in the country, and the taxation
amount is calculated according to the BTC/EUR exchange rate at
the time of transaction.
United Kingdom
The UK is moving forward with treating digital currencies as outside
the scope of value added tax (VAT), which is a welcome move
for businesses within the sector. At the time of writing, it has been
announced that Jersey, another British Crown dependency, will
be applying a “light touch” to regulate bitcoin in the near future.
Watch this space.
United States of America
The United States is still figuring out how and whether it wants to
tax bitcoin on a federal level. Due to bitcoin’s unknown impact on
the economy, determining a proper taxation percentage is difficult,
as well as which individuals or businesses should fall into this
category.
Those who receive any form of income from virtual currencies
such as bitcoin should be subject to bitcoin taxation. However,
this income can be divided into four different categories: wages,
hobby income, bartering income, and gambling income. All of
these categories are subject to different taxation percentages.
128 Part III: Using Bitcoin in Business
Evading taxes because you’re dealing with bitcoin or other virtual
currencies isn’t possible. Tax evasion is one of the many situations
bitcoin industry experts want to avoid by collaborating with government
officials to create a proper regulatory framework.
The United States could turn out to be quite the divided front in
terms of bitcoin regulation. Every state can draft its own independent
laws and requirements for bitcoin users and companies alike.
Some states may even decide not to regulate bitcoin altogether,
depending on whether digital currency is being viewed as a currency,
digital asset, or barter item.
As a result, it will take quite some time until legislators and regulators
can come to an agreement as to how bitcoin usage should be
regulated. Several countries have issued taxation guidelines on
bitcoin already, yet the government wants to know more about the
potential financial impact on local economies before taking things
one step further.
Getting help with bitcoin taxes
The field of bitcoin itself is still in its early stages, and making
sense of taxation guidelines in applicable guidelines is not an easy
task. Luckily, there are a few services and companies helping out
bitcoin users in order to calculate potential taxation amounts.
Keep in mind that not all of these services are available to every
country in the world. More similar services might become available
over time, although no official projects have been announced
at this time.
Here are a few services and companies helping out bitcoin users in
order to calculate potential taxation amounts:
✓✓Free software called LibraTax (www.libratax.com) has integrated
bitcoin support. Being able to calculate capital gains
taxes and losses (for deduction) as well as getting an overview
to your entire taxable bitcoin income takes just a few
minutes with LibraTax. For a small fee, the company will generate
a very detailed report to help you save time and money
on paperwork.
✓✓Another platform called Coyno (https://coyno.com) profiles
itself as a bookkeeping solution for bitcoin users. You
have the ability to import bitcoin wallets from major online
service providers to create a detailed overview of incoming
and outgoing transactions. At the time of writing, a proper
Chapter 9: Staying on the Right Side of Legal 129
bitcoin taxation feature was not enabled just yet, but is scheduled
for release within the next 12 months.
✓✓BitcoinTaxes (https://bitcoin.tax) serves as a platform
to calculate bitcoin taxes for capital gains and income
according to the latest regulatory requirements. Not only
does BitcoinTaxes support bitcoin, it supports other virtual
currencies such as Litecoin and Dogecoin as well. Transaction
data can be imported from major exchanges or bitcoin platforms,
and nearly a dozen major fiat currencies are supported
at this time. There is a free plan available, which is limited
to 100 transactions, whereas the paid plan (U.S. $19.95/year)
includes unlimited transactions and will also import transactions
from the blockchain(s) directly.
Bitcoin Regulation Around
the World
Bitcoin regulation differs from country to country, just like the
tax situation (see the previous section). In some countries, it may
even differ from state to state, or province to province. There are
no rules set in stone as far as bitcoin regulation is concerned, and
some countries may even decide to never regulate bitcoin at all.
There are very few places in the world where bitcoin regulation
has enforceable rules. Most countries have decided to issue a
warning on bitcoin, explaining the risks to citizens in terms of bitcoin
not being overseen by a central authority nor being tied to a
physical asset.
Whether or not the world will be ready for the potentially disruptive
technology that bitcoin brings to the table remains to be seen.
Putting financial power into the sole control of the individual user
rather than relying on centralized services and institutions is a
major change in the world of finance.
It goes without saying that most governments and financial institutions
are wary of this shift in paradigm, as they would not stand to
benefit directly from mass bitcoin adoption. Even though various
countries have decided to tax bitcoin, the digital currency could
have a major impact on local economies, which could be either
positive or negative for financial institutions.
130 Part III: Using Bitcoin in Business
Regulating with BitLicense
Applying existing financial regulations to bitcoin is unlikely to
work, because it will most likely create an adverse effect. A prime
example of such regulatory measures comes in the form of New
York’s BitLicense. Despite the best efforts of bitcoin industry
experts, a central authority drafted rules for bitcoin companies in
the state of New York that a large segment of the bitcoin community
deems harsh and unreasonable.
The main concern most bitcoin companies have with the
BitLicense regulation is the extensive guidelines requiring
BitLicense to give customer information to the state of New York.
Many bitcoin industry leaders see this as an invasion of customer
privacy, leading quite a few companies to suspend services in the
New York state area.
Applying for a BitLicense is subject to a $5,000 nonrefundable fee,
in addition to legal costs easily ramping up to $20,000. There is no
guarantee that applying for a BitLicense will be successful, and bitcoin
companies may be forced to provide additional details regarding
their business model or customers to state officials.
On top of that, the BitLicense regulation contains some antimoney‐
laundering guidelines that are in contrast with federal
guidelines. To make matters worse, bitcoin companies are being
scrutinized more than traditional financial institutions, which have
a notorious history of fraud, corruption, and mismanagement of
customer funds.
Bitcoin regulation will help legitimize the digital currency, but in
our opinion BitLicense is an example of how it should not be done.
The regulatory requirements put in place will hamper bitcoin
growth in New York state, and the excessive costs associated with
obtaining a license are just not manageable by most companies at
this time.
The sum of $25,000 may not seem like much to make a business
legal in the state of New York, but most bitcoin companies have a
long‐term picture in mind. As more and more businesses comply
with BitLicense regulations, it will be seen as an incentive for other
states to adopt the same guidelines. Legitimizing a bitcoin business
in all 50 states combined costs in excess of $1 million.
By refusing to comply with BitLicense regulatory requirements and
shutting down services in the New York state area, bitcoin companies
are sending a clear message: Bitcoin regulation is a positive
Chapter 9: Staying on the Right Side of Legal 131
trend, but trying to copy‐and‐paste a traditional financial regulatory
framework onto bitcoin companies and slapping a high price tag on
license application fees will not fly.
Regulating elsewhere
Other countries around the world are not making much progress
in terms of bitcoin regulation to this date. Countries such as The
Netherlands and Finland have declared bitcoin to be subject to
capital gains tax, but that’s about as far as regulatory measures
go. Both countries are sticking to a “laissez‐faire” approach until
the European Union comes to terms on whether or not it wants to
regulate bitcoin.
Asian countries, on the other hand, are trying to prevent thirdparty
payment processors from using bitcoin altogether. No official
laws have been created declaring bitcoin to be banned or outlawed
in Asian countries — with the exception of Vietnam — yet central
banks are doing everything they can to discourage payment processors
from getting involved with BTC.
The next few years will play a pivotal role in terms of bitcoin regulation
and how it will affect mass adoption of digital currency.
A healthy discussion between regulators and bitcoin industry
experts would be a good place to start, but it is impossible to tell
which country will allow or outlaw bitcoin in the future.
Money transmitter licenses or not?
A pressing question keeping bitcoin users on edge is whether or
not their local government can classify them as money transmitters.
A money transmitter is a business entity that provides money
transfer services or payment instruments.
And after all, bitcoin can be spent, traded, and bought, making it a
way of transmitting money around the world. The question to that
answer is rather complex, yet some basic form of guidance seems
to be in place all around the world.
Depending on where they live, individual bitcoin users may or
may not be looked at as money transmitters, as long as they buy,
sell, and trade bitcoin in exchange for goods and services. Once
an individual starts exchanging bitcoin for fiat currency to or from
other users for personal gain, a money transmitter license may be
required, depending on where the user is located.
132 Part III: Using Bitcoin in Business
Bitcoin bans in several countries
Vietnamese government officials have officially prohibited the use of bitcoin in the
country altogether. Whether or not there is an official law in place to prosecute
Vietnamese citizens involved in bitcoin is uncertain, as is how severe punishment
could be.
The same principle applies to Bolivia. The country’s central bank, El Banco Central
de Bolivia, officially banned any currency or coins not issued or regulated by the
local government. This specific regulation applies to bitcoin as well as other major
digital currencies such as Namecoin, Feathercoin, Dogecoin, Quark, and Peercoin.
This policy issued in 2014 and officially states that “it is illegal to use any kind of
currency that is not issued and controlled by a government or an authorized entity.”
None of the virtual currencies in existence today is issued nor controlled by a central
authority, which means that Bolivia will not be dealing with digital currencies
any time soon.
Colombia is another South American country that is looking to outlaw bitcoin,
but it has not done so yet. Bitcoin could have a major impact on local economies,
especially in countries where inflation and hyperinflation are major problems. In
Colombia, it remains unclear as to whether the “ban” would be against bitcoin
transactions in terms of commerce, or buying and selling bitcoin through exchange
platforms, or both.
Ecuador decided to ban bitcoin completely in 2014, as well as any other form of
decentralized digital currency. However, at the same time, the National Assembly
of Ecuador established guidelines for the creation of its own centralized state‐run
currency. Government officials are permitted to make payments in “electronic
money,” so it will be interesting to see how this project plays out in the future.
Iceland is taking a slightly different stance on the idea of banning bitcoin. Using
bitcoin as a means of transaction is not prohibited in Iceland, yet buying and selling
bitcoin through foreign exchanges is not allowed. Doing so constitutes a movement
of capital outside of the country, which is in violation of Iceland’s capital controls.
Kyrgyzstan is not too keen on bitcoin either. The National Bank of the Kyrgyz
Republic stated the use of bitcoin or other virtual currencies as a form of payment
is illegal under current state law. There is only one currency deemed to be legal
tender in the country, which is the som (KGS).
Other countries around the world are keeping a close eye on bitcoin to see how
it could possibly impact the local economy. More countries may or may not ban
bitcoin in the future, depending on how the regulatory frameworks are established
across different continents.
Chapter 9: Staying on the Right Side of Legal 133
Bitcoin enthusiasts who are involved in the mining process to generate
additional bitcoins and help confirm transactions are a different
matter entirely. Creating bitcoins and selling these amounts to
other users for real currency or its equivalent in other commodities
is in fact being a money transmitter. However, such a ruling
has not been enforced anywhere in the world just yet. It is more of
a sign of things to come.
Last but not least, bitcoin exchange operators — individuals or
businesses who convert bitcoin to and from fiat currency — have
to register for a money transmitter license in most jurisdictions.
Regardless of whether they trade bitcoin or other virtual currencies
intermittently or against fiat currency, a money transmitter
license is required in almost every country of operation. One
noticeable exception is that of the Isle of Man. Crypto companies
in this jurisdiction have to comply with the relevant AML/CFT
guidelines overseen by the island’s Financial Services Authority,
but their core activity is not yet licensable under current FSA
guidelines.