Small businesses that want to take crypto payments often hear that a “payment processor exemption” keeps them clear of money transmitter rules. The source documents point to a more useful way to think about it. The exemption has four specific conditions, FinCEN’s 2019 guidance says crypto payment processors generally do not meet them, and the guidance gives a clear picture of who counts as a “user.” This post walks through those pieces and then turns them into a practical set of choices for a merchant.
Where the Exemption Comes From
The exemption traces to FinCEN ruling FIN-2014-R009, dated August 27, 2014. It lists four conditions for a payment processor to fall outside the money transmitter definition (FinCEN FIN-2014-R009).
| Condition | What it requires |
|---|---|
| (a) | Facilitates purchases of goods or services |
| (b) | Uses systems admitting only BSA-regulated institutions |
| (c) | Operates under a formal agreement |
| (d) | Agreement is with the seller or creditor |
In that ruling, FinCEN looked at a company that acted as a sales organization and as a payment processor for card and ACH transactions. It found that the sales-organization activities did not make the company a money transmitter, and that the processor activities appeared to meet conditions (a), (c) and (d). Condition (b) was unclear because the letter did not describe how funds were disbursed. FinCEN said that if disbursements run exclusively through systems that admit only BSA-regulated institutions, the company would not be a money transmitter, and that if they occur outside such a system, the exemption would not apply (FinCEN FIN-2014-R009).
Payment Processor Exemption: What the 2019 Guidance Says About Crypto
On May 9, 2019, FinCEN issued guidance on business models involving convertible virtual currency (CVC). It says payment processors are intermediaries that let traditional merchants accept CVC for goods and services, and that CVC payment processors generally qualify as money transmitters because they do not meet all four conditions. The one that usually fails is condition (b): CVC processors do not operate through clearance and settlement systems that admit only BSA-regulated institutions (FinCEN 2019 guidance). A Morrison Foerster summary describes it the same way (Morrison Foerster).
The guidance also says money transmitter status depends on activity, not on the label or the technology a business uses (FinCEN 2019 guidance). That is why the exemption comes up so often and why it matters to read its conditions rather than assume it applies.
Who Counts as a User
Under the 2013 guidance quoted in the 2019 document, a user is a person that obtains virtual currency to purchase goods or services on the user’s own behalf, and mere users are generally not money transmitters. The guidance gives examples: someone using an unhosted wallet to buy goods or services for themselves is not a money transmitter, and neither is someone who anonymizes their own CVC to pay for goods or services (FinCEN 2019 guidance). Administrators and exchangers, by contrast, are generally money transmitters (FinCEN 2019 guidance).
What the Guidance Does Not Address
The Morrison Foerster summary does not discuss merchants (Morrison Foerster). The guidance itself mentions merchants in the context of processors that enable them to accept CVC, and includes an example involving a merchant-owned wallet in a footnote (FinCEN 2019 guidance).
Practical Choices for a Merchant
- Accept crypto only for your own goods and services. In my view, this fits the “user” and “merchant” picture in the guidance more closely than the processor or exchanger descriptions, since the guidance ties money transmission to accepting value from one person and transmitting it to another.
- Use a processor that is itself in the money transmitter framework. The guidance says processors generally are money transmitters, and money transmitters that are not exempt must register with FinCEN within 180 days of starting to engage in money transmission (FinCEN 2019 guidance). In my suggestion, choosing a processor that meets those obligations places the compliance work with the party the guidance describes as responsible for it.
- Keep the activities separate. The guidance focuses on accepting and transmitting value for others. In my view, a business that sells products and also offers to hold or move crypto for customers has a different activity from one that only sells products, and the second is the clearer starting point.
- Keep a simple record of each crypto sale. In my suggestion, a dated list of the sale, the amount and the product supports whatever you later report.
The Records a Merchant Keeps for Each Crypto Payment
The FinCEN documents settle the registration question; the IRS FAQs cover what a merchant records. The IRS says digital assets are treated as property and that records should document receipts, sales, exchanges, dispositions or transfers of digital assets and their fair market value, without prescribing a bookkeeping method. For digital assets received for services, it says the income is the fair market value in U.S. dollars when received, and that the basis is that same value if it is included in income. On a later sale, gain or loss is the difference between adjusted basis and amount realized, short-term at one year or less and long-term above one year (IRS digital asset FAQs). The FAQ page does not directly address a merchant selling goods for digital assets, so the services rules are the closest published guidance and I use them as a model for record fields, not as a ruling on goods.
An assumed example of the arithmetic. A merchant records a payment worth $600 in U.S. dollars at the moment of receipt. If the merchant later sells the coins for $650, the gain is $650 − $600 = $50; if the merchant sells for $550, the loss is $50. A merchant who converts the payment immediately through a processor has a much shorter holding period and very little difference between the two numbers, which is a record-keeping benefit of immediate conversion that follows from the arithmetic. The amounts are made up.
This gives the earlier list a concrete final step: for each crypto sale, log the date and time, the product, the U.S. dollar value at receipt, the processor or wallet that received it, and the date and proceeds of any later sale. Those five fields cover the IRS record categories above and make the year-end summary a sort instead of a reconstruction.
My Take on the Payment Processor Exemption
- In my view, the encouraging part of the documents is how specific they are. Four conditions, a clear user definition and a clear registration deadline give a merchant concrete things to compare against its own setup.
- In my view, the simplest merchant setup is the one that stays closest to selling your own goods, and the guidance points the same direction by describing money transmission as accepting and transmitting value.
Sources
- FinCEN: Application of FinCEN’s Regulations to Certain Business Models Involving CVC (May 9, 2019)
- FinCEN: Administrative Ruling FIN-2014-R009 (Aug. 27, 2014)
- Morrison Foerster: FinCEN convertible virtual currency guidance (May 2019)
- IRS: Frequently asked questions on digital asset transactions
Related reading: Operating a Crypto Kiosk Isn’t Like Any Other Small Business and Putting a Crypto ATM in Your Store? Read This First.
This article offers general information and my own opinions, not financial, tax, or legal advice. Laws, tax rules, and products change and can differ by location, so check current official sources and talk to a qualified professional about your own situation.