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Cryptocurrency has created big news in the business world. For one thing, crypto has benefits that lead businesses to use it for commercial transactions.
Additionally, millions of people around the world are trading in crypto. Are you, too, trading in cryptocurrency? You can do so safely by using the Immediate Edge.
Bitcoin, the oldest cryptocurrency of all, is the crypto king and has the highest market capitalization. But even with all the good news, crypto’s volatility gives accountants headaches. Cryptocurrency abounds with complexities for accountants who maintain the books for clients who deal in cryptos.
This blog post discusses some of the details accountants must understand about bitcoin and other cryptocurrencies.
Cryptocurrency Basics
Cryptocurrency is a digital asset and crypto coins exist in binary form. People use them as a medium of exchange. Cryptocurrency is not like denomination currency but is cryptographic in nature.
Another way to describe cryptocurrency is to say that it is backed by blockchain. This means that information about crypto transactions, once recorded in distributed ledgers, becomes immutable. Furthermore, each cryptocurrency coin—such as ether, Dogecoin, Tether or bitcoin—uses its own a decentralized control system. Moreover, each coin follows its own developers’ protocols. This provides an extremely high level of safety and security but it makes life more difficult for accountants.
Cryptocurrency and Taxation
In its earliest days, governments did not tax cryptocurrency transactions. However, in 2014 the US government began taxing cryptocurrency.
These days, most governments in the world view crypto as personal or business property. This makes it an asset, and anything worthy of being an asset must adhere to the rules of taxation.
Things About Crypto That Accountants Should Know
There are certain things about cryptocurrency that accountants must have a good understanding of. Here is a rundown of some of those things.
1. Cryptocurrency Is Not Legal Tender
First, understand that cryptocurrency is not legal tender. This means that governments do not recognize cryptocurrencies. Instead, crypto is a parallel economic system. Crypto is managed and accounted for similarly to stocks and bonds.
2. Cryptocurrency Transactions Taxable
When you buy bitcoin, you can either profit or lose from your transactions. This is because bitcoin, like all crypto, is highly volatile. You might be riding high one day but the next day lose everything you gained previously.
Always keep in mind, however, that when you are buying and selling or trading in crypto and earn a profit, those gains are taxable.
3. An Entity That Uses More Crypto Has More Accounting Complexities
When an individual or entity buys and sells cryptocurrencies, they create complexities in their accounting records. Trading among multiple cryptocurrencies involves layers of computation. For example, accountants must understand calculations such as fair market values, adjusted cost basis, gains and losses, and more.
This level of bookkeeping becomes quite complex, making accountants’ jobs more difficult than ever.
4. Calculations Are Based on Adjusted Cost Base
The adjusted cost basis is the average of the cost of acquiring your first cryptocurrency and that of your last cryptocurrency. When accountants calculate profits and losses with crypto, they do so using the adjusted cost basis.
If their client deals in more than one cryptocurrency, the accountant must calculate the adjusted cost basis for each crypto coin independently.
5. Crypto Is a Volatile Financial Instrument
The rules, regulations, and protocols for cryptocurrency vary by country. For example, in El Salvador crypto coins such as bitcoin are considered legal tender because bitcoin has become the country’s only currency. But this is not the case in China. In China, as in some other countries, cryptocurrency is illegal.
Finally
Crypto is currently not regulated by the US government, nor do any US law enforcement bodies oversee its operations. However, the day is likely coming when the US government, as well as the governments of other countries in the world, will enact regulations specific to crypto.
Mainly this is because crypto can be misused. Malicious elements have exploited bitcoin and other cryptocurrencies for money laundering and other illegal activities. Therefore, accountants must have a good understanding of the bookkeeping details for crypto and remain vigilant as governments step in to enact and begin enforcing regulations.