Crypto companies need a specialized approach.
Our accountants specialize in supporting
the cryptocurrency business in Estonia.
To receive advice from our specialists,
leave your Email below
There is no doubt that the crypto market has grown faster than anyone could have predicted. With a current market capitalization of over $300 billion, it’s safe to say that cryptocurrencies are here to stay. However, accounting for crypto assets remains a challenge for many businesses. The unique characteristics of cryptocurrencies present several potential accounting problems if they are not handled carefully. Any business that deals in or accepts cryptocurrency as payment must understand how these digital assets need to be accounted for and reported to the IRS. This article will explore the specifics on how you need to account for your crypto holdings and transactions, if you plan on making them part of your company’s balance sheet.
What Are Crypto Assets?
Cryptocurrency is a digital asset that can be utilized as a medium of exchange. It comes in the form of virtual “coins” that can be exchanged via computer networks. One of the main advantages of cryptocurrencies is that they are decentralized. This means that they are outside of government control, including regulation and taxation. Because of the decentralized nature of cryptocurrencies, there is no central governing body that sets rules and regulations for their use. Businesses that accept cryptocurrencies as payment must understand the unique accounting rules that apply to them.
Accounting Basics for Crypto Business
All businesses must account for their assets and liabilities on their balance sheet. They must report the amounts of each on their Income Statement. Any revenue that a company generates must also be accounted for. The basic accounting rules for cryptocurrency remain the same as for any other asset. The main difference is that the values of the cryptocurrencies must be recorded at the fair market value. This is in contrast to accounting for other assets, where the value is recorded at the original cost. The reason for recording the value of cryptocurrencies at the current trading price is that it is constantly evolving. This is because there is an active marketplace for every cryptocurrency where owners can buy and sell them.
Accounting for Receipt of Cryptocurrency
When a business receives cryptocurrency as payment for a good or service, it is treated as a taxable event. The business must record the receipt on their books as ordinary income. This is regardless of whether the cryptocurrency is kept or immediately exchanged for fiat currency like USD. The business must record the amount received from the sale of goods or services, minus any expenses involved in making the sale. This includes the amount charged for the goods or services sold. The business must also report any change in the value of the cryptocurrency on their books as ordinary income. This applies even if the cryptocurrency is immediately exchanged for fiat currency.
Accounting for Crypto Currency Transfers
When a business conducts a transaction involving the transfer of cryptocurrencies, the same rules apply as a conventional transaction. The rule is that there is a taxable event when the cryptocurrency is transferred to another owner. This is referred to as a “disposition” in accounting terms. The disposition of the cryptocurrencies must be recorded on the books of the business. The transaction is treated as if the business had sold the cryptocurrencies for their fair market value. The proceeds from the sale are then recorded as ordinary income. The business must also record a “gain or loss” based on the difference between their basis (cost) and the fair market value of the cryptocurrency. Any gain or loss from the disposition of the cryptocurrencies is added to the business’s ordinary income on the income statement.
Final Words: Key Takeaways
Cryptocurrencies are a new and unique form of digital assets. They present accounting challenges when it comes to calculating the value and reporting them on company books. The basic accounting rules for cryptocurrency remain the same as for any other assets. The main difference is that the values of the cryptocurrencies must be recorded at the fair market value. This is in contrast to accounting for other assets, where the value is recorded at the original cost. Any business that receives cryptocurrency as payment for goods or services must report the receipt as ordinary income. The same rules apply when a business conducts a transaction involving the transfer of cryptocurrencies. With the growing popularity of cryptocurrencies, businesses must be prepared to account for their holdings properly.