Many accountants are not crystal clear on how to handle the finances of clients who use blockchain technology, and cryptocurrencies, specifically Bitcoin. The best way to tackle any issue you don't understand is to do the necessary research to educate yourself. In the case of blockchain technology, and cryptocurrencies like Bitcoin, today on the Rules of Thumb blog from MoneyThumb we have done the heavy lifting for our accountant readers. We hope the following results of our research help clear up any confusion you as an accountant may have about blockchain technology and Bitcoin.
A lot of people thought that cryptocurrencies were a flash in the pan fad, but it has become evident that cryptocurrencies are not going anywhere anytime soon. In fact, they are the most popular examples of blockchain technology in use today, Bitcoin being the most popular.
However, before we get into the details of cryptocurrency, let's define exactly what blockchain technology is. Investopedia describes it in the following way:
- Blockchain is a specific type of database.
- It differs from a typical database in the way it stores information; blockchains store data in blocks that are then chained together.
- As new data comes in it is entered into a fresh block. Once the block is filled with data it is chained onto the previous block, which makes the data chained together in chronological order.
- Different types of information can be stored on a blockchain but the most common use so far has been as a ledger for transactions.
- In Bitcoin’s case, blockchain is used in a decentralized way so that no single person or group has control—rather, all users collectively retain control.
- Decentralized blockchains are immutable, which means that the data entered is irreversible. For Bitcoin, this means that transactions are permanently recorded and viewable to anyone.
The most popular form of cryptocurrency is Bitcoin. And the bottom line for accountants is this: The IRS is owed taxes on Bitcoin gains and treats Bitcoin as a convertible virtual currency. Below are key takeaways about Bitcoin:
Accounting for Bitcoin
Below are some definite guidelines that the US has put in place to deal with Bitcoin:
For federal tax purposes, Bitcoins and other cyber-currency are considered property. Tax 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 virtual currency as taxable income when it is used to pay for goods or services.
- The fair market value is determined as of the date acquired; basically, it is (virtually) exchanged for U.S. dollars for tax purposes.
- 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 business expenses throughout the year.
Of course, the most important accounting practice 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.
Blockchain technology and cryptocurrency like Bitcoin look to be here to stay, so accountants shouldn't shy away from handling these types of transactions and the financial bookkeeping for these clients. You once had to learn about market instruments such as stocks, bonds, and other holdings, and you can learn accounting for blockchain technology and cryptocurrency as well.