Cryptocurrency 101: Understanding the basics of Digital Currency

Crypto, with its dynamic and volatile nature, can add a dash of drama to this picture. As per the guidance from the Association of Chartered Certified Accountants (ACCA), cryptocurrencies should be considered as having an indefinite useful life for the purposes of IAS 38. This makes cryptocurrencies an intangible asset with similar treatment to the GAAP classification. Also, the unpredictability of volatility has led to more issues affecting the profits of any business that uses cryptocurrencies. For instance, suppose you receive Bitcoin of $10,000 worth but the value falls to $8,000 once they are changed to fiat money; the business is going to have to factor in that loss. Therefore, it’s only natural for regulatory bodies to class it as an asset instead of a currency, because if crypto is considered a currency from a regulatory perspective, most transactions would be tax-free.

Record the currency you mined in the income account, and record any amounts you have spent to mine the currency as an expense on your books. Cryptocurrencies are a virtual currency that allows people across countries to do business without adding costs to the transaction by charging a currency conversion fee. The fees you get charged using cryptocurrency are usually less than the 3% charged by a credit card. The currency is essentially a mobile app or computer program that acts like an online wallet. You then use that online wallet to send and receive currency with others with the same wallet.

Step 3: Calculating Gains and Losses

Here’s a step-by-step guide to help you accurately report your cryptocurrency activity. Every transaction involving cryptocurrency creates a taxable event, whether it’s buying, selling, or trading. CFOs must be aware that even trades between different cryptocurrencies (e.g., Bitcoin for Ethereum) trigger tax obligations, as the selling price of one cryptocurrency becomes the cost base for the other.

• In the United States, the IRS treats mined cryptocurrency as taxable income, subject to income tax and, for individual miners, self-employment tax.
• This guide will introduce you to the basics of cryptocurrency accounting, ensuring you stay compliant and keep accurate records for your tax returns.
• For example, the IRS insists that all users of cryptocurrency declare all activity with the asset in their annual tax return forms.
• This classification was established because crypto assets don’t fit neatly into existing asset categories like cash or equity securities.
• By subtracting the cost from sale price, it can be determined as capital loss or profit and later categorized as short-term or long-term depending on its holding period.
• For cryptocurrencies, we treat them as assets, but the classification can vary depending on the jurisdiction and the specific nature of the transaction.

How can miners generate money?

To ensure compliance with crypto tax laws, keeping detailed records is essential. Using crypto tax accounting software helps you track your transactions and calculate your taxes automatically. Additionally, staying informed about the latest regulations and working with a tax professional experienced in cryptocurrency accounting can help you avoid costly mistakes. Cryptocurrency accounting requires careful tracking and a clear understanding of how to record transactions.

Calculating crypto taxes

In the second quarter of 2021, Microstrategy added nearly $500 million of additional Bitcoin holdings. Not all cryptocurrency is treated equally; there are different types of assets which are used in different ways. One reason is that you may need to report the balances of your crypto holdings to your tax office.

At first glance, it would seem like the most readily apparent way to account for cryptocurrency, but it poses some problems. On June 1, you see the value of that same 100 Bitcoin is now worth $150, so you sell it for $150. You would reduce the cryptocurrency account in your asset section by the $100, and increase an account in your income statement section to house the $50 gain on the transaction, and increase your cash by $150. In both cases, companies would initially recognize cryptocurrencies on the balance sheet at their cost basis. There’s no need to amortize them as an indefinite-lived intangible asset, but rather a loss must be recognized should the asset ever become impaired. Currently, public companies must account for a digital currency as an intangible asset with an indefinite life under GAAP in the United States and international financial reporting standards abroad.

Why Should I Care About Crypto Accounting Anyway?

Mining uses a system of nodes (computers knows as miners) to carry out designated tasks to make transactions possible. Let us try to understand this process using an example of a Bitcoin network. A distributed ledger, or distributed ledger cryptocurrency accounting 101 technology (DLT), is a database that is distributed and synchronized across several computers across multiple sites, institutions, or countries.

Cryptocurrency is a relatively new asset class, and the way it’s treated for accounting purposes can vary depending on where you are and how you use it. In this article, I will walk you through the process of accounting for cryptocurrency transactions, helping you understand the entries, the challenges, and how to keep your books in order. Reporting crypto taxes protects your wallet (contrary to popular belief among traders). But they don’t track your cost basis—which means your taxable gains can be severely inflated. The anonymity and lack of regulation surrounding cryptocurrencies make them susceptible to use in illegal activities such as money laundering or tax evasion. CFOs must be vigilant in monitoring large or frequent cryptocurrency transactions, ensuring that they are legitimate and well-documented.

The move to fair value aims to resolve this imbalance, allowing companies to recognize both unrealized gains and losses as they occur, providing a clearer picture of financial health. Cryptocurrencies are typically classified as intangible assets, as per our friends at GAAP and IFRS. But remember, each business is unique, so it’s always a good idea to consult with a financial advisor or accountant to ensure you’re categorizing correctly. If you’re trading or selling your crypto at a higher price than you bought it for, that’s a gain, my friend! If you sell your crypto at a lower price, that’s a loss, and that can decrease your net income.

One thing to keep in mind is that most small firms are not obligated to provide accounting information that adheres to GAAP. These companies prepare financial statements using either cash or tax basis accounting systems, which give them more options when it comes to categorizing crypto assets. These FAQs cover common questions and concerns related to crypto bookkeeping, wallet management, tax compliance, and accounting practices. They can be added to the blog post to provide readers with additional clarity and guidance on managing their digital assets effectively. These standards provide guidelines for recognizing, measuring, and reporting cryptocurrency-related transactions and holdings. Tax compliance is a critical aspect of crypto bookkeeping, as many jurisdictions have specific guidelines and regulations for reporting cryptocurrency transactions and income.

It’s a type of accounting, which involves the financial reporting rules and practices related to cryptocurrencies, applicable to both investors and businesses. Cryptocurrencies are known for their volatility, with values fluctuating rapidly. This volatility adds a layer of risk to financial management that CFOs must navigate. It’s essential to stay informed about global cryptocurrency regulations and ensure that all transactions comply with applicable laws, especially when dealing with international transactions. It is a virtual currency that may be used to make payments, with transactions in a cryptocurrency coin taking place solely through its own blockchain. The original cryptocurrency, Bitcoin, is the best example of a cryptocurrency coin.

As a Senior FP&A professional, Mike has helped businesses—from Fortune 100 giants to scrappy startups—unlock tens of millions of dollars in value across industries like Entertainment and Telecom. His knack for identifying opportunities and solving complex financial problems has earned him a reputation as a trusted finance expert. Our intuitive software automates the busywork with powerful tools and features designed to help you simplify your financial management and make informed business decisions. Our team is ready to learn about your business and guide you to the right solution.

• Discover how digital ownership has evolved beyond collectibles into a foundation for Web3 identity, gaming economies, and creative monetization.
• Our attorneys have decades of experience in the complex fields of tax law, cryptocurrency, marketing law, and more.
• Analysts must consider factors like the underlying technology, use case, and development team’s credibility.
• The government moves slower than a snail when adopting to new technology so expecting straightforward crypto tax guidance is wishful thinking.

Cryptocurrencies are considered property and not currency like regular dollars. When you sell the currency, you will record the sale for the amount of the value of the currency on that date. When you’re “mining” cryptocurrencies, you’re creating new value for that currency (the digital equivalent of printing money, without the inflation).