Recently, a New York law firm made news when it announced that it would begin accepting Bitcoin as payment. The firm will partner with a Bitcoin payment processing company who will host the firm’s payment system and assist the firm in converting digital currency payments into fiat currency. Other professionals are taking notice, and are permitting clients to pay for legal services using Bitcoin. Should you?
Bitcoin is a decentralized digital currency based on a mathematical algorithm. Bitcoin can be bought or sold online, and be used to pay for goods or services. It is not managed by any central authority; rather, transactions occur through a server that communicates and confirms a transaction and records it on a ledger. Vendors can convert Bitcoin into real world currency, or use it to buy other goods and services. Its value is legitimized by those who say it has value. Its value also fluctuates, like other currencies; as of July 1, 2013 one Bitcoin was equivalent to $90 USD.
Is Bitcoin a good idea for my practice? Accepting Bitcoin may be prudent if your firm deals with international clients and transactions, as international financial transfers can be cumbersome and expensive, particularly if you have a high volume of small transactions. Further, in contrast to transaction fees normally associated with credit card processing, which can often be as high as 3-5% for small businesses and law firms, Bitcoin services can be less than 1%.
Adopting Bitcoin may be a good PR move too, attracting young entrepreneurial clients that are looking for innovative legal services and demonstrating that your firm is on the cutting edge, tech-wise. Some argue that Bitcoin is a stable form of currency, immune from political risk, and is a very secure form of payment, as Bitcoin customers leave no data behind that can be used to steal their identity.
However, critics of Bitcoin argue that the currency as too volatile, vulnerable to exploitation by tax cheats and their ilk.
But what about the legal and ethical implications? A federal judge ruled in August 2013 that Bitcoin should be treated like any other form of currency, and in November the U.S. Department of Justice recognized Bitcoin as a legal means of exchange. The IRS treats Bitcoin as property, so a Bitcoin transaction triggers a taxable event. Specifically, a buyer incurs tax liability for the difference in dollars between what they paid for a Bitcoin when they acquired it and the dollar value attributed to the Bitcoin when they spend it, while a seller is subject to a tax based on the dollar value of the Bitcoins they receive for a good or service.
As to Bitcoin’s ethical implications, the Model Rules permit an attorney to accept Bitcoin in exchange for legal services. Since Bitcoin has a dollar-value (as you can buy and sell Bitcoin in an online exchange for U.S. Dollars), it is relatively easy to determine the worth of your Bitcoin. If a client pays an attorney $1,000 in Bitcoin, the attorney can convert the Bitcoin into $1,000 today, and the Bitcoin value goes away. Even if the value of Bitcoin waxes or wanes, $1,000 is credited to the attorney’s account, in compliance with the rules.
Does Bitcoin make sense for your firm? If you think so, be sure to keep these tips in mind:
- The Model Rules require that a fee for legal services must be “reasonable.” To that end, when accepting Bitcoin, make sure to use the current exchange rate of Bitcoin to USD as a guide. For example, you could charge clients “$1,000 USD or its present Bitcoin equivalent.”
- Convert. Upon accepting a Bitcoin sum, transfer it into dollars to be able to account for this sum for accounting purposes and pay taxes.
- Be up front. If you offer Bitcoin as a payment option, provide information to clients about what the system is, and how it works. Clients will value the transparency, and increased dissemination of information about the system will help to legitimize the transaction.