Ask HN: Is it ok to pay outside contractors in bitcoin?

[jebeng]

Sorry if this is a silly question but I just want to make sure there isn't going to be some kind of accounting issue down the road by doing this.

Seems like a win win for us since it works out cheaper overall by quite a bit. And it looks like there are a lot of people out there now willing to work for bitcoin.

[bayesianhorse]

The short answer is: No.

The long answer: With some financial engineering it might be a good idea to pay outside contractors, but only with tight contracts. You need a portfolio of bitcoins and preferably some derivatives to hedge the risk inherent in that. You need to be able to buy bitcoin in forward.

You need to factor in the time it takes for the recipient to convert bitcoin to something usable in his currency (at least 7-14days) and add a premium to the payment covering the risk he is taking on. You can omit the latter but then the recipient is going to detract that premium from the price of the contract...

[bayesianhorse → bayesianhorse]

I forgot to add that I would only consider this option when your only other means of payment exceed the costs of financial engineering involved in bitcoin payment...

I haven't calculated it yet, but I would estimate the cost to be between 3 and 10%, and certainly higher when mistakes are made.

[jebeng → bayesianhorse]

In this case though we would only pay in bitcoin when specifically requested by the contractor. So the contractor would bear all the risks associated with that.

[Metatron]

It shouldn't be cheaper for you, Bitcoins are still taxable income. It's not some magic, legal way to evade tax.

Check out this article for extra info, obviously specifics depend on national tax laws: https://en.bitcoin.it/wiki/Tax_compliance

[celticninja → Metatron]

It can still be cheaper for you, bitcoins become taxable income at the point they are realised i.e. converted to fiat.

As someone making payments in BTC int he way described (by BTC with USD, pay freelancer BTC) there is little difference between paying in BTC or USD. However the freelancer is the one who will dealw itht he tax implications and as he/she has elected to be paid in BTC you can defer responsibility to them.

Aditionally if you are paying someone in a differnt country or otherwise would have to use a different currency then you will probbably see savings in BTC as there is no conversion to, e.g. EUR, no bank transfer/international wire fees, and the freelancer may also take less in BTC than in USD due to the ease of transferring the coins to them as oposed to going through the banking system and it taking 14 days.

[jebeng → Metatron]

Oops. I should have elaborated there. The savings I was referring to were more from not having to pay a percentage to a freelance worker website, or not having to pay fees through paypal, as well as people seemingly willing to work for cheaper effective rates if being paid in bitcoin(note: I have no data to back this up).

But assuming everything is in order tax wise, in a future audit is the use of bitcoin going to throw a wrench in works or anything?

[bayesianhorse → jebeng]

Certainly. How to manage a bitcoin portfolio isn't worked out at all. One of the problem is how to factor in the price instability with the payment schedule.

[bayesianhorse → Metatron]

I would actually be willing to accept payment this way, but only under very large provisions and at a considerable premium... for example I wouldn't have accepted btc at 200$ during the recent price blow up...

[dagw]

How is contract going to be written? Are you going to set the rates is USD (or whatever your local currency is) and convert that to bitcoins at the going exchange rate once it's time to pay, or are you going to set the rates in bitcoins and let the contractor bear the currency risk.

[jebeng → dagw]

Yes, we would be setting the rates in USD.

At this point the plan would be to keep a small amount of USD in Mt.Gox and buy bitcoin at a set time and send immediately when payment is due.

This is all new to me, but it seems like a reasonable plan at this point. So if I'm missing something silly here let me know! Thanks

[dagw → jebeng]

Just make sure the contract is very clear on exactly which exchange rate you'll be using and at what time. Imagine you agree on a deadline of Friday at midnight for some project. The contractor delivers the finished job and final invoice to you on Friday 4 pm, but you don't get around to handling his invoice until next Wednesday at 11 am. Which exchange rate will you use? The answer to that question could be worth several thousand dollars to one of you, so it's not a question to take lightly or assume that it won't cause massive potential headaches for you.

[muhkel]

Would you like to get your salary in currency that is worth $250 one day and $120 the next day?

[jebeng → muhkel]

Well I'm (hopefully) going to be the one paying freelancers, so what happens with their money isn't much of my concern.

No company money would ever be sitting in bitcoin for more than the few seconds it would take to transfer.

[patio11 → jebeng]

No company money would ever be sitting in bitcoin for more than the few seconds it would take to transfer.

I know why you think this, but it is based on incorrect premises, namely that your expectations for quality of service from professional financial services firms apply equally to the Bitcoin "economy."

Consider, for example, the case where you ask your freelancer "What is the invoice in BTC?" and he quotes you "100 BTC". You go attempt to buy Bitcoins at the spot price of ~$100 each. You see a message saying "Your order has been placed, but to protect our customers, we are going to take the liberty of manually reviewing it." The following day, the order is canceled and the spot price of Bitcoins is now $140. You are now effectively short BTC, which is unfortunate, because you're losing.

There are other failure modes. They can be catastrophically expensive. As both a buyer and seller of consulting services, the notion that you're worried about a ~3% charge to transfer money to settle up a freelancing engagement is valuable signal with regards to the general level of business acumen being brought to bear on this decision. So, as somebody who wants both you and your freelancers to have happy, successful lives: bringing BTC into the picture brings in large extrinsic risks of project failure, when doing business with freelancers is already fraught with many risks. I would suggest avoiding it.

Regarding accounting issues: I wouldn't expect any but if your accountant is like my accountant I'd expect you to run up a few hundred dollars in fees prior to him being comfortable signing off on there being no accounting issues here.

[jebeng → patio11]

Great answer. Thank you very much. Definitely making me think twice about the whole situation.

edit: Sorry, just want to be clear about this part:

"the notion that you're worried about a ~3% charge to transfer money to settle up a freelancing engagement is valuable signal with regards to the general level of business acumen being brought to bear on this decision."

Is your meaning here more towards:

3% is an insignificant amount to worry about on such an important part of your business

or

it's a good thing to try to stretch your funding as far as you can by saving costs like these

[patio11 → jebeng]

I don't want to discourage you, because everybody got started somewhere, but mentioning money transfer costs in the context of contracts/payroll (and considering paying in Bitcoin) waves a really big "We have never done this whole 'business' thing before" flag. I will repeat again that I'm on your side, but that is how the market will read it. (n.b. Anyone saying "I accept Bitcoin for my services!" is waving the same flag even harder.)

[jebeng → patio11]

I figured that was what you were getting at. I just wanted to make sure. I appreciate it, thank you.

[dragonwriter → jebeng]

> No company money would ever be sitting in bitcoin for more than the few seconds it would take to transfer.

If the contract is in $ and you pay in BTC, you are essentially paying in $ and providing a convenience to the contractor of converting it to BTC for them; assuming you are relatively certain your additional cost would be more than the additional amount they would demand for payment in $ rather than BTC, this is a no brainer (providing that the agreement specifies how you are going to do the conversion, to minimize the risk that you get into a dispute with them over conversion details.)

If the contract is in BTC, the original volatility question ("would you like to be paid in currency that is worth $250 one day and $120 the next") still applies, though rephrased to focus on where your risk is: "Would you like to contract to pay in a currency that might be worth $120 the day you write the contract, and $250 the day you have to make the payment."