In January, the online discount store Overstock.com—which sells everything from home goods to electronics to furniture—made news when it became the first major retailer in the world to accept Bitcoin. First introduced in 2009, Bitcoin is the oldest and, by far, the best known of the more than 40 digital currencies that have sprouted up in the past few years. But until recently, the money, which is linked to no one nation and is not regulated by a central bank, was used mainly by collectors to purchase and sell goods and services among themselves.
Overstock’s embrace of Bitcoin came at a pivotal moment, as both the mainstream press and financial regulators, including the Internal Revenue Service (IRS) and the Securities and Exchange Commission (SEC), have turned their focus to the virtual money. What’s more, the Bitcoin world is still reeling from one of its first major crises: In February, Mt. Gox, the most popular Bitcoin trading platform online, experienced a sudden and dramatic collapse, losing some 750,000 of its customers’ Bitcoins. The Trusted Professional spoke to Overstock.com’s Chairman of the Board Jonathan E. Johnson III (pictured above, left) and CFO Robert Hughes (above, right) to find out how the decision to accept Bitcoin has played out for the company so far, and what accounting implications the move has had.
What made the company decide to accept Bitcoin as payment?
Jonathan E. Johnson III: We’d been watching it for about a year and just took an interest in it. Back in mid-December, our CEO, Patrick [Byrne] was asked by a reporter at the end of an interview, in an offhanded way, ‘Do you think you will ever accept Bitcoin,’ and he responded, ‘Yes, I think we will, likely in the second half of this year.’ There was a lot of press that picked it up and, internally, a lot of excitement about it. We had developers who were eager to get on the project, and that’s what we did. We also liked the idea of a finite currency—which cryptocurrencies generally are—and not a fiat currency subject to continual devaluation. So from that perspective, it was appealing as well.
What did the process involve? I imagine it was more complex than just putting up a sign that said, ‘We now take Bitcoin!’
Johnson: That’s correct. We have an agreement with a company called Coinbase, which processes Bitcoin payments. So if you come and purchase a $100 toaster on our site, we immediately receive 100 U.S. dollars, and Coinbase keeps the Bitcoins. There was about a 10-day push to get that interface done, and then we put out a press release and new customers spending Bitcoin came to the store.
Though you use another company to process Bitcoin, could you go into the mechanics of how the process works?
Robert Hughes: Imagine looking for an item on our website, which is priced in dollars. You’d select Bitcoin as your form of payment and, as you check out, you’d get instructions that say send X in Bitcoin to complete your purchase. You can either do that from our site, if you happen to be a Coinbase subscriber, or from [service providers that contract with Coinbase]. People who use Bitcoin are used to using different payment protocols. It then confirms back to you that the Bitcoins have been received and the transaction procedure is done. Then Coinbase pays us the dollar amount that you saw as a purchaser on the website.
How many people use Bitcoin to pay for goods on Overstock?
Hughes: It now [represents] over a million and a half dollars of revenue this year, which I think is a pleasant surprise, and over half of the people using it are new customers to us, which is also nice. So we’re reaching a new audience. It’s not yet material to overall results, but it’s been a nice, positive surprise for us. When I looked at it as CFO, once I understood the financial implications and how it could save us money at a low risk, it became a no-brainer. You don’t have the fraud risk you have with credit cards, there’s no charge-back system and, with processors like Coinbase, you pay far less than you would in merchant fees to a credit card company. So for us, technically, it was like adding to your checkout process something like PayPal.
Johnson: When we first announced that we would be accepting Bitcoin, there was a spike in the percentage of sales using it—it came to 2.5 percent of revenue the first few days and then settled down to about a half percent of revenue. It has been pretty steady after the initial announcement. From a merchant’s perspective, integrating with a company like Coinbase makes it awful easy for the CFO and the finance department to set up Bitcoin transactions, as it’s not that different from taking a credit card or PayPal—you’re just giving your customers another way to spend their money with you. From our experience, it’s mostly new customers and different demographics from those we’ve considered typical, and order sizes are a little bigger, so for us what’s not to like? New customers, different customers spending more money—it’s the CFO’s dream.
Are there particular products people tend to use Bitcoins to buy?
Johnson: For us it’s a different demographic. Our typical customer is a home decor shopper and a woman. Our Bitcoin customers tend to be men buying appliances, computer accessories, cell phone accessories and much more technology than our typical customer.
Hughes: Though we have seen some venture outside of that. Some Bitcoin customers have been buying furniture and bedding and things like that, too. So it’s been kind of interesting to watch.
Ultimately, how are Bitcoin transactions treated on the financial report?
Hughes: From a revenue point of view, we’re recognizing revenues based on the dollar amount that we receive from Coinbase, which is the dollar amount the customer paid, so there really is no accounting for Bitcoin at that point. I should add, though, that we have chosen to hold a small amount of Bitcoin—we do purchase some, so we have to address the accounting for any Bitcoin purchases and holdings. We’re hoping, over time, suppliers and maybe employees will want to take Bitcoin as a form of payment, so it’s not significant, but we are starting to accumulate some Bitcoin on our own.
In March, the IRS released, for the first time, guidance about digital currencies such as Bitcoin, saying that they should not be counted as currency for tax purposes, but should, instead, be treated as property. How did this affect the accounting?
Johnson: I think the IRS has gotten this wrong. And, until they change their mind, as Bitcoin becomes used more and more as a currency, the IRS ruling is going to be difficult to comply with and, I think, difficult to enforce. Right now, a lot of people hold Bitcoin as a commodity, which is how the IRS property rule seems to make sense, but Bitcoin at its heart is meant to be a currency. The idea of tracking each purchase and then each receipt of Bitcoin and every remittance of Bitcoin, and matching those up, isn’t consistent with a currency. It might be a bad move by the IRS—if Bitcoin stays flat or goes down, this would be a way for folks to avoid taxes because they will say they acquired [it] at X and then remitted it when using it as currency at .9X, and they can take a loss every time. I don’t know if the IRS thought of the downside.
Hughes: I would have preferred a currency approach. On the order side, the IRS guidelines don’t add any complexity for us, but for the Bitcoin we hold, we will have to track every lot we buy on the basis and, when we start to use it, we will have to do this annoying game of calculations. As a spender, I would have preferred a currency approach rather than a property asset approach. We have set up our accountants to track our basis every time we purchase Bitcoins and, as yet, we haven’t spent any, but we will have the records to do that, too. It will be annoying and it’s not ideal, as a user of a currency.
And how are the Bitcoin holdings accounted for?
Hughes: Well, we looked first and foremost at the GAAP [generally accepted accounting principles] guidance, and, of course, there isn’t anything official in the literature about Bitcoin. So we looked for analogous things and talked with our auditors at KPMG and decided, from a GAAP point of view, to use a lower-of-cost-or-market approach to value the Bitcoins we held.
Given that Bitcoins are now taxed at capital gains rate, have Bitcoin payments significantly affected the bottom line?
Hughes: No, not yet. It’s not significant and we haven’t triggered gains or losses yet.
And what does the future hold for your relationship with Bitcoin? Do you anticipate accepting other crypto-currencies like Doge coin or Litecoin?
Johnson: With cryptocurrencies, we’re open to accepting others, but we think Bitcoin has a first-mover advantage. If we accept others, it will likely be because they have plugged in through Coinbase. We don’t want to sign up with a half dozen different processors. If Dogecoin or LibertyCoin or Litecoin or the other currencies work with Coinbase, then it becomes pretty easy for us to accept them, but we will wait and see how they play out, as Bitcoin does have a significant advantage in the early market.