Tackling The Complexities of Accounting for Crypto Companies
Accounting for cryptocurrency can be an incredibly complex process, especially for businesses that handle a large number of different tokens or hold onto their assets for longer periods of time. At first glance, accounting for crypto tokens might appear to be a fairly straightforward process; companies record the value of their holdings at market value on their balance sheet and record any gains or losses they make as they sell different cryptocurrencies. However, this initial impression is deceiving; recording the market value of your cryptocurrency holdings isn’t quite that simple. For example, if you track your company’s cash flows separately from its balance sheet (which you almost certainly should), then how do you account for transactions in which you receive or spend cryptocurrency? And what about if you purchase a cryptocurrency as an investment rather than using it as a medium of exchange? Accounting for those transactions becomes significantly more complicated.
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Determining Fair Market Value
If you’re tracking the value of cryptocurrency you hold as an asset, then you’ll want to record the fair market value of that asset in your company’s financial records. The easiest way to determine fair market value is to track the price fluctuations of different cryptocurrencies and then use price averages or other calculation methods to determine a fair value for the different tokens. When tracking cryptocurrencies as assets, you’ll need to be careful to track the fair market value of the tokens throughout their entire lifespan. This means you’ll need to make adjustments if the price of the tokens ever fluctuates. As an example, imagine you purchase one Bitcoin for $9,000. If the price of Bitcoin rises to $10,000 by the time you sell it, you’ll need to record an additional $1,000 as a gain. However, it also means you’ll have to adjust the value of your Bitcoin holdings to $10,000.
Bitcoin Losses Are Taxed as Business Losses
If you purchase Bitcoin that you plan to hold onto as an investment, then you’ll want to record the initial market value of the coin as an asset. However, because you don’t plan on using the coin as a medium of exchange, you’ll want to consider recording the purchase price as a loss on the transaction. The IRS treats business losses as taxable events, so if you record a loss on your initial Bitcoin purchase, you can apply that loss to whatever profit you make in the future when you sell the coin, essentially canceling out the gain. This essentially allows you to claim the loss without having to pay taxes on it.
Short-term Investment Gains Are Taxed as Capital Gains
If you purchase a cryptocurrency with the intention of selling it for a short-term profit, then you’ll want to record the initial purchase price as a short-term capital gain. This essentially treats the transaction as a short-term investment, which incurs a lower tax rate than a business profit. If you sell your coins for a profit and they fall under the short-term capital gain category, then you have to pay taxes on the transaction. However, if the amount you earn is less than $3,000, you can report the transaction on your taxes as a “miscellaneous” income. However, if you earn more than $3,000, then you’ll have to report the full amount as a “miscellaneous” income, but you’ll also have to pay taxes on it.
Accounting for cryptocurrency can seem like an incredibly daunting task, but with the right tools and a little bit of guidance, it doesn’t have to be. We hope this article has helped you understand some of the complexities of accounting for cryptocurrency. With the right tools, you can make the process easier, and you can rest assured that you’ll have nothing to worry about come tax time.