Accounting for cryptocurrencies is likely to become a major concern for both large and small companies as they slowly but surely making their way into real-world transactions.
Many businesses are looking for better ways to manage, track and account for crypto assets. Bookkeepers and accountants need to know how to properly account for them. The potential of cryptocurrencies is huge, fully tapping into it requires innovations in the finance and accounting industries.
Digital currencies are becoming more integral to daily life with the bitcoin ATM. Imagine smart cities around the world where the economy is powered by digital currency for paying bills, buying groceries, giving loans, or purchasing a car. It could be closer than we imagine.
Why do cryptocurrencies pose an accounting dilemma?
Cryptocurrency is electronic currency -- digital public money -- and it is created using complex mathematical equations. Cryptocurrency has no intrinsic value as it isn’t redeemable for another commodity, like gold, and it has no physical form (like coins) – it is basically a long string of computer code.
Transactions are performed and validated by the users of the system and an intermediary (like a bank) isn’t necessary to facilitate the functions.
The use of blockchain technology eliminates intermediaries and avoids many of the regulations that normally apply to financial transactions.
Blockchain is a continuous record, using an open distributed ledger (many copies of on many computers) that records transactions between two parties in a permanent and verifiable way. Security is ensured by cryptography and the open distributed ledger.
Cryptocurrency is not held by an entity like a bank but stored in a ‘wallet’ on a computer, cellphone, or in the cloud. It is not tied to a person but to specific keys and so the owner isn’t identifiable, although all transactions are publicly available in the blockchain.
How to deal with cryptocurrencies
One of the biggest challenges is the tracking and managing of crypto assets and transactions. Its cryptographic nature is inherently complex. This is likely to result in individuals neglecting best accounting practices, and businesses not being able to rely on conventional tools.
Fintech, automation and blockchain have to come together and provide smart solutions for how to facilitate accounting operations, such as tracking and managing transactions and handling taxes.
For businesses and everyone who owns cryptocurrencies, being proactive is essential when it comes to managing your assets for bookkeeping and tax purposes. It’s useful to create a crypto profile by mapping out accounts, wallets and exchanges. Stay informed about the latest crypto news, trends and changes to compliance.
Some of the guidelines put in place by the U.S. government
- Cryptocurrencies are not treated as currency to determine losses or gains under tax laws.
- Every cryptocurrency transaction creates a taxable event. Whether buying, selling, or trading, any resulting losses or gains are taxable.
- Taxpayers have to include the fair market value of the virtual currency as taxable income when they use it to pay for goods or services. This applies to any cryptocurrency transaction and is determined by the assigned value at the time of purchase. For example, if a customer pays 0.00500 Bitcoins for your services, your revenue is 0.00500 times the sale price of a single Bitcoin at the exact moment the Bitcoins are received.
As cryptocurrencies are unregulated by banks or governments, it is difficult for law enforcement agencies to police their use. They can be used for tax evasion, money laundering and other illegal practices. It’s important to protect your clients by knowing exactly why each crypto-transaction was performed, and having the bookkeeping as proof.