Things To Consider For Year-End Crypto Accounting
Considering the next few decades, the FUTURE of money seems bright and hugely relies on the stronghold of “Cryptocurrencies”. These popular virtual assets have taken the finance world by storm. It is likely to see that every 1 in 4 investors uses cryptocurrencies for secure online payments without involving any third-party intermediary.
Digital currencies are powered by Blockchain technology for the secure storage of every specific transaction. With this in mind, it is clear that both crypto and Blockchain are going to revolutionize the finance industry. Although cryptos bring many benefits over traditional currencies, they are also complex to deal with at the same time.
As businesses or investors are more likely to invest in virtual currencies, they should be well aware of accounting and tax challenges. Thanks to the modern technology that has opened the doors to find solutions that help tackle the crypto accounting challenges. Now the majority of businesses are on the route to search for better ways of tracking and managing crypto assets.
In this blog section, we will cover everything related to the concept of crypto accounting and primarily accounting considerations that need to be brought into place.
Before we start, we have a question that needs to be answered-
Do You Pay Taxes On Cryptocurrency You Acquire?
Your answer might be YES just like other individuals and businesses who are usually responsible for paying taxes while selling, buying, or exchanging cryptocurrencies. These taxes usually apply to currencies like Bitcoin and others that hold equivalent value in real currency.
So let’s get started…
What Exactly Is Cryptocurrency Accounting?
Although there is no single reason to take the understanding of cryptocurrency accounting, the most common is that these virtual assets are a highly growing financial system with countless tax implications.
In Simple words – Cryptocurrency accounting refers to all the financial reporting requirements, especially for the investors and businesses dealing with virtual assets. It is a complete process of recording, managing, and tracking cryptocurrency transactions.
With cryptocurrencies continuing to evolve, challenges associated with taxes and accounting will also emerge. However, with the upbringing of the latest financial products, the finance industry continues to accelerate at its best.
Common Crypto Reporting Issues Arise With Accounting Standards
A Frequent Change In Value – Cryptos completely differ from traditional cash or money as such digital assets undergo a frequent change in value. Although it seems like the easiest way to account for specific crypto, one still faces some problems.
An individual isn’t allowed to account for a virtual asset utilizing the same standards. Also, the majority of governments haven’t declared or confirmed how these virtual assets would be accessed from a regulatory point of view.
Popularly Exist As Intangible Asset – Cryptocurrencies are digital currencies that hold non-physical property. In Simple words, they don’t acquire physical substance. They are classified as intangible assets that are likely to be measured at some cost. As crypto can’t be identified physically, they raise some challenges.
Companies have to recognize the existence of virtual assets considering the balance sheet on a cost basis. Whenever the price of the crypto asset drops below the cost basis, they get disabled. It is likely to occur often because of its volatile nature.
Unrealized Losses on Investments – Not gains, just unrealized losses recorded! These result from digital assets that have decreased value and have not been sold yet. Let’s simplify with an example – suppose your business buys a Bitcoin that holds more than $300,000 worth, then it is likely that its fair value will drop to $200,000. You’ve to realize that your Bitcoin holding will reflect some decrease in value.
Even if the market value increases later to somewhere $400,000, you aren’t allowed to update the value on the balance sheet. The value will be equivalent to $300,000 as per the Generally Accepted Accounting Principles (GAAP). This clearly defines the unfavorable situation for businesses that frequently invest in virtual currencies.
End-of-Year Crypto Tax Considerations for Small Businesses
As 2022 unfolds, small business owners have a lot of queries in their minds, especially related to taxes and accounting. If you are currently holding crypto coins, now is the right time to figure out various other tax considerations to which your small business has to pay attention. These are not some kind of financial or tax advice, but you have to be aware of these and discuss them with your tax accountant.
Leverage The Software For Proper Tracking Of Crypto Transactions: It is more important than ever to keep proper track of cryptocurrency transactions. This is the only way for the Internal Revenue Service (IRS) to get a clear picture of accounting – How much you paid for the specific digital asset and whether the sale was profitable or not.
Learn What Cryptocurrencies Are Categorized As Property: You have to get a complete understanding of those cryptocurrencies that are categorized as property. The Internal Revenue Service (IRS) recently categorizes the crypto assets as property so they are open for both short-term and long-term gains when it comes to selling digital currencies.
Collect Tax Losses Using Cryptos For A While: With the crypto downturn recently, investors have got the biggest opportunity to harvest tax losses that can further hold for many years. Your transactions would be recorded as a loss on the distributed ledger which you can turn around and repurchase the same you just sold. In simple words, you have the same coins but locked the loss that can be spread for many years.
Only A Few Of Digital Assets Are Taxable: Generally, only a few digital asset actions are taxable and some are not. The chances are higher that you are taxed on the crypto you have earned but not for crypto transfers between digital wallets or exchanges. If you have less information, you can ask the accountant about how that works.
As cryptocurrencies’ popularity continues to evolve, tax and accounting challenges aren’t going anywhere. That’s why we got this guide for you covering the highlights of some main accounting considerations. With all these in place, it will become clear that the accounting part of your crypto transactions needs a lot of attention.
Due to the increasing complexity and rapid growth of crypto transactions, there is a need to seek a technology partner that helps you better tackle digital asset reporting. We as a leading accounting firm combine the high-end expertise to better handle your crypto reporting needs. Contact FreeCashFlow today.
Free 30-Min Strategy Session
By the end of this Strategy Session, you will have a clear understanding of the next steps you can take for your business to take advantage of the tax deductions you are missing out on.