ACCOUNTING FOR BITCOIN AND DIGITAL ASSETS
In an article, “Cryptocurrency: Bitcoin or Beertokens?” from AccountingWEB , the author writes that a number of U.S. states have issued guidance on how to tax transactions involving Bitcoin, and it can be assumed that other countries will follow suit eventually. According to the article written by Kara Sommers, “In general, for state income tax purposes, the IRS treats cryptocurrencies as property. Thus, transactions using virtual currency are subject to the same rules as barter transactions.” Sommers also writes that a recent ruling by the U.S. Commodity Futures Trading Commission classified cryptocurrency as a commodity and that might have an effect on any future rulings by the IRS.
Accounting for cryptocurrency might seem a little confusing at first as they are an intangible asset. Again, we can look at some guidelines around digital assets that the US has put in place to deal with them for direction:
For federal tax purposes, Bitcoins and other crypto assets are considered property. Tax considerations and accounting principles that apply to property apply to them.
- Cryptocurrency is NOT treated as currency to determine losses or gains under tax laws.
- Taxpayers MUST include the fair market value of the digital assets as taxable income when they are used to pay for goods or services.
- The fair market value is determined as of the date acquired; basically, as an accounting treatment it is (virtually) exchanged for U.S. dollars for tax purposes.
- From a tax perspective, a taxpayer can have a virtual loss or gain; for instance, if they bought the Bitcoins when they were at their peak of $1000 or so, they would have a loss.
- Accounting services simply need to keep in mind that for regulatory compliance when accepting Bitcoins as income, they must choose a valuation strategy, place them on the Schedule C or 1120 Form, and reduce by business expenses throughout the year to reduce the risk of major accounting and tax issues.
Of course, the most important accounting practice for digital assets is to record the value of the cryptocurrency at the time you receive it and at the time you “spend” it. In this way, you can accurately calculate gains and losses on your financial statements.
ACCOUNTING FOR BITCOIN AND DIGITAL ASSETS
Digital assets are often very complicated and controversial to deal with, especially when they are not regulated by central banks. It will likely take some time for laws and regulations to be developed that work perfectly with digital currencies.
There is no need to be overwhelmed by the accounting and tax issues around digital assets, as long as you implement the right tools and best practices.
Accounting for Cryptocurrency Management
Assets like these often don’t fit directly into existing accounting software’s boxes; however, they can be tracked through integrations with trading platforms such as Coinbase or Gemini. Some companies like Libra Tax are setting up their own software specifically for digital currencies, to track data in a way that is compliant with the IRS.
There is also a cryptocurrency asset tracker service available through tracking website Pricewise . The service is currently only available for Android devices and costs $3.99 per month, but they plan to launch an iOS version soon.
Here are some of the steps you can take to ensure your accounting practices are optimized for handling cryptocurrencies: If you have employees who are paid in cryptocurrency, you must comply with all the applicable rules regarding payroll withholding and tax reporting.
If you receive income in crypto form (whether as payment for services or goods or as a salary), make sure to report it accurately on your tax return Schedule C, which is where self-employed individuals list their business revenue and expenses.
As always, make sure you retain all the records related to your crypto transactions for as long as necessary.
If you purchase cryptocurrency for investment purposes, use those digital assets as a capital asset rather than a personal expense.
Keep in mind that if you want to use digital assets as a capital asset, your capital losses and gains must be calculated against capital gains and losses of other like-kind assets (e.g., stocks, bonds, etc.).
Digital assets are not treated as cash; therefore, if you exchange it for cash or deposit it in your bank account, the full amount is treated as income on your tax return.
Keep an eye out for IRS updates regarding cryptocurrency – the agency has stated that it will be releasing more details regarding how virtual currency is treated for tax purposes.