While the official status of cryptocurrencies is still undecided, they are making their way into real-world transactions for goods and services. This creates a sort of dual nature for cryptocurrency as both commodity and currency. If you have clients who use cryptocurrency, as an accountant it is important to understand the basics of accounting for the cryptocurrency client.
The Rules of Thumb blog from MoneyThumb wants our readers who keep books for clients who use cryptocurrency to understand the most important aspects they involve when it comes to accounting. We have listed these aspects below:
- Cryptocurrencies are not real currency--Cryptocurrencies are not considered legal tender. They are viewed as a commodity, and therefore handled as an investment. This means they can be managed and accounted for in the same way one accounts for other securities, such as stocks, bonds or ETFs.
- Every cryptocurrency transaction creates a taxable event--Whether buying, selling or trading, any gains or losses that result from the use of cryptocurrencies are taxable.
- Accounting for cryptocurrency is harder when more than one cryptocurrency is involved--Buying, selling and transacting between more than one cryptocurrency essentially layers multiple calculations of cost bases, fair market values, adjusted cost bases, gains and losses on top of each other. This level of accounting is more time-intensive and relies on solid bookkeeping.
- Capital gains/losses must be calculated based on the adjusted cost base--The adjusted cost base is basically the average cost for all of the cryptocurrency a client has acquired, from the first bitcoin purchased to the most recent. If your client is using multiple cryptocurrencies, then you must calculate the adjusted cost base separately for each type of coin.
- The IRS doesn’t audit crypto-transactions … YET--Just because the IRS doesn't audit cryptocurrency yet doesn’t mean they won’t in the future. In the long run, the best way to protect your client is to report any gains/losses as you would for stocks.
- It’s wise for clients to sell cryptocurrency for CASH--If and when you do report your client's crypto gains/losses remember to advise them to sell some cryptocurrency for cash. The IRS isn’t accepting bitcoins just yet, so your client will need the cash in order to pay taxes.
- The value of a transaction is determined by the FAIR MARKET VALUE on that day--This goes for any cryptocurrency transaction, whether as a commodity trade or a payment. For example, if you accept cryptocurrency as payment for your accounting services, you will receive the fair market value of the cryptocurrency for that particular day of payment.
- The distinction between HOBBY AND BUSINESS trading has major tax implications--If the cryptocurrency transactions in question are being conducted as a hobby, then any gains made are capital in nature. This means that only 50 percent of those gains will be taxed. If these are business transactions, then 100 percent of the gains are taxed, just like business income.
- Cryptocurrency remains a volatile financial instrument--Cryptocurrency regulations vary widely across countries. In some nations, such as China, use of cryptocurrencies remains illegal. It is wise for bookkeepers and accountants to be familiar with these distinctions in order to ensure regulatory compliance, especially if cryptocurrency is being used for international transactions.
- Due to their anonymity, cryptocurrencies may be used to conduct ILLEGAL activities--Cryptocurrencies are unregulated by banks or governments, and as such, law enforcement agencies have a difficult time policing their use. The result is that cryptos are often used for money laundering, tax evasion, and other illegal practices, meaning large or frequent crypto-transactions could draw some pointed attention. Protect yourself and your client by knowing exactly why each crypto-transaction was performed, and by having the impeccable bookkeeping to prove it.
- Mining Bitcoin is the act of “creating” new bitcoins – it’s also considered a BUSINESS--Cryptocurrencies acquired through this activity (Bitcoin and several others) are essentially considered a form of compensation, in exchange for the miners having provided a service to the blockchain network through the use of the individual’s computer, internet, and energy resources, or other methods. Any cryptocurrency earned in this fashion should be treated as income and reported.
The team at MoneyThumb hopes that this list of basics of cryptocurrency accounting will help you properly take care of any clients you have that use this form of currency. If you have any questions about cryptocurrency that we have not answered above, by all means, leave us a comment and we will address your issue.
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