A book-keeping needs are indispensable while running any organisation because they helps to curb with the errors if occur financially, to boost the acceptance of loan applications and they streamlined tax filings.
When you think of it like that, there’s not much point in using special crypto accounting. The two are more like apples and oranges. In this guest article, we explore how cryptocurrencies should be recorded on your balance sheet and how they ought to affect your accounting records.
Classification
When we talk about accountancy of cryptocurrency, the information related to every purchase or sale and trade of the digital or virtual currency, such as Bitcoin, needs to be properly documented and recorded. Due to the regular volatility of its value, the figures of accountancy of cryptocurrency may often be difficult for accountants to keep track of.
Because there are no regulations for how firms should treat cryptocurrencies, there is limited possibilities about whether a specific firm can or will comply with accounting standards and regulations.
Accounting for cryptocurrency is a must when it comes to the transparency of a business. Businesses can now track and manage cryptocurrency using Cryptoworth and remain compliant with accounting standards with less hassle than ever, save money and time for tax-prep services, as well as make tax prep more efficient.
Cost basis
Cryptocurrency cost basis is the money you’ve used to acquire a digital asset, including associated fees. This amount serves as a base from which you can calculate capital gains and losses by selling, trading or getting rid of that asset – one of the critical data points while calculating cryptocurrency capital gains tax. This tax liability is based on selling, trading or disposing a crypto asset. With the ‘last in, first out’ (HIFO) method, you can lower the taxes on short-term capital gains; however, a run-in with IRS agents might land you in hot water for cost basis methods.
It would be also impossible to determine your cost basis, since the program would need to note both the date and the price, as well as the wallet address of each purchase (plus fees or commissions). All at once. The calculations become quickly more intricate and error-prone the more complex your transactions are.
Transactions
Increasingly, companies and traders will need to report on transactions taking place in cryptocurrency. This represents a reporting challenge: data on such transactions are available from a growing number of diverse trading or transaction recording platforms, which need to be reported on (for instance, by aggregating data, consolidating data, assigning values and classifications to data, etc).
Accounting for crypto is also a moving target, so companies need to stay informed about updates on how to classify these means of exchange. Because current standards don’t address digital assets, companies need to use their best judgement in determining an appropriate treatment of their digital assets.
They must decide on some method of estimation, document any increase or decrease, and deal with the tax consequences of each sale – a process that requires time and a lot of manual labour.
Impairments
The nature of the data produced by cryptocurrency trading makes its collection, consolidation and valuation difficult, not to mention manually reconciling the figures. Bookkeeping presents itself as the biggest headache for businesses operating in the world of crypto because, more often than not, this task doesn’t seem important enough to prioritise.
Our work shows that current accounting (or lack of) for crypto assets leads directly to inconsistency and distortion in financial statements, where firms relying on IFRS (or GAAP) guidance can ‘pick their poison’ and therefore arrive at different outcomes for firms that take different approaches. Such inconsistency and distortion are precisely why regulators are necessary to issue authoritative, definitive accounting standards for cryptocurrencies so investors have relevant, decision-useful information for firms that hold cryptocurrencies.
Taxes
If a company sells or exchanges cryptocurrency for business purposes, that sale or exchange is taxable. The profit realised from its sale or exchange must be recorded on the company’s books at the date of sale or exchange (its fair market value) for the accounting period in which the sale or exchange occurs, and any difference between the fair market value and the taxpayer’s original cost basis is reported as capital gains or losses.
They should be recorded using first-in, first-out (FIFO) costing because that way the tax records of a cost basis and capital gains and losses are properly tracked. Each crypto asset is identical to any other crypto asset, and so segregation is necessary for the crypto investor and taxpayer.
Tracking the details of trading cryptocurrencies takes an experienced team watching the process and providing reports with complete information. Otherwise, this work could result in big problems during tax-filing season.
