Accounting for cryptocurrency in accordance with widely accepted accounting standards is a frequent concern with many business. Because of this, organizations have thought of classifying them as cash, intangible assets, investments, or inventories. In this article, we will quickly describe cryptocurrencies and examine how current accounting standards may be applied to cryptocurrencies.
What is The Connection Between Accounting and Cryptocurrencies?
Standard accounting procedures (GAAP) require that cryptocurrencies be documented as an intangible asset at cost and that any value decline be disclosed. This suggests that a company’s balance sheet’s worth might depreciate over time. You should record the value of the cryptocurrency at the moment you acquire it and at the time you “spend” it. This is the most crucial accounting procedure for digital assets. You may compute gains and losses on your financial accounts precisely in this method. Since cryptocurrencies are an intangible asset, accounting for them may initially seem a little confusing. Once more, for guidance, we may look at:
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Certain Regulations Put in Place to Deal with Digital Assets
- Bitcoins and other crypto assets are regarded as property for federal tax reasons. They are subject to the same accounting and tax rules that apply to property.
- Tax compliance regulations DO NOT regard cryptocurrency as currency for calculating losses or gains.
- When digital assets are used to pay for goods or services, taxpayers are REQUIRED to include the fair market value of those assets as taxable income.
- As an accounting procedure, the fair market value is (virtually) swapped for U.S. dollars as of the date of acquisition.
- A taxpayer may have a virtual loss or gain when it comes to taxes; for example, if they purchased Bitcoins at their peak price of around $1000, they would incur a loss.
- Accounting services such as local accountants just need to remember that for regulatory compliance when accepting Bitcoins as income, they must select a valuation strategy, and reduce business expenses throughout the year to lower the risk of significant accounting and tax problems.
Dealing with digital assets is frequently extremely difficult and contentious, particularly when they are not subject to central bank regulation. The creation of rules and regulations that fully align with digital currencies is probably going to take some time. As long as you use the appropriate tools and industry best practices, the accounting and tax challenges surrounding digital assets won’t overwhelm you.
Accounting for Cryptocurrency Transactions
Questions about the appropriate accounting for these transactions develop as more businesses accept cryptocurrencies. How should accounting seem if a business takes cryptocurrency as a form of payment? What does the entity get? Sadly, U.S. GAAP does not currently offer recommendations on how to account for cryptocurrencies.
In spite of being referred to as a currency, crypto would not be treated as cash for financial reporting reasons. Cash, according to the Accounting Standards Codification (ASC) Master Glossary, “includes not only currency on hand but also demand deposits with banks or other financial institutions.”
Despite the fact that no sovereign state supports crypto as a mode of payment, you can use cryptocurrencies as a means of exchange as long as both parties consent to the transaction. For the same reasons, cryptocurrencies do not fit the definition of foreign currency. Furthermore, because they are not easily convertible into known amounts of cash and carry a greater than a negligible risk of value change, cryptocurrencies are not cash equivalents.
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Cryptocurrency Accounting and Taxing
However, there will be times when your tax reporting and accounting standards for financial statements diverge. You will need to make journal entries in conformity with IFRS and GAAP when disclosing revenue from cryptocurrency transactions under the previous regulations since the laws have changed.
In particular, you must record journal entries in accordance with the current IFRS and GAAP regulations whenever an impairment event takes place that doesn’t result in a tax gain for unrealized losses.
In actuality, most publicly traded companies would find it simpler to adhere to crypto coins reporting requirements than GAAP. The tax basis of accounting is easier to understand and often does away with the idea of depreciation.
Keeping Track Of Your Cryptocurrency On Your Ledger
When using fiat money to buy a cryptocurrency asset, debit the cryptocurrency asset account and credit your cash account. The loss account must be debited and the asset account must be credited in order to account for any losses as they happen.
Before you put your cryptocurrency investment up for sale, you need to delete it from your records by crediting the asset account with its book value and debiting the account that reflects the money you got in return for selling it.
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If you’ve sold your crypto for actual money, debit your cash account. In the event that you converted it into another digital asset, debit the new cryptocurrency account. The difference should then be added to a capital gain or loss account in order to balance the transaction.
Future Accounting Perspectives
The FASB and the International Accounting Standards Board (IASB) are both doing preliminary study, despite the fact that neither existing U.S. GAAP nor International Financial Reporting Standards (IFRS) officially address accounting for cryptocurrencies. More recently, the IASB requested that the matter be investigated by its IFRS Interpretations Committee. The FASB is separately debating whether to take on the more comprehensive problem of accounting for intangible assets and may include digital currency as part of its work.
As discussed accounting for cryptocurrency is challenging but manageable. In the end, treating cryptos as intangible assets is the best match. As previously stated, cryptocurrencies lack physical substance and are not considered to be financial assets. As a result, in order to account for cryptocurrencies, they must first be recorded at cost, subject to impairment. Cryptocurrencies are considered indefinite-lived intangible assets since there is no defined lifespan for them. As a result, the cryptocurrency must be tested for impairment at least once a year and more frequently if certain events or circumstances suggest that it is more likely than not impaired (for example, a decline below cost in the quoted price on an exchange may be such an event).
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