Accounting is the process by which transactions pertaining to a company or business are recorded. This process includes the accounting, analysis, and reporting of these transactions to tax authorities, regulators, and tax collectors. With the increasing legalization of Bitcoin and cryptocurrencies, being aware of how to do cryptocurrency accounting is very important. Stay with us to learn more about it.
Cryptocurrency accounting by region
In many countries, traditional accounting rules don’t apply to cryptocurrencies since they’re entirely new forms of value. Thus, it’s considered that they can’t be exchanged in the traditional way for goods and services, even though an increasing number of entities are adopting this method of payment.
In the United States, for example, companies are required to account for cryptoassets such as Bitcoin under the rules of “ intangible assets “. This category also applies to entirely different cases, such as intellectual property.
Under these rules, companies must register Bitcoin at the time of purchase. If the cryptocurrency increases in price, companies record the gains only at the time of exchanging it back for fiat currency. However, if a price decrease occurs, they must write down an impairment charge to justify the new balance.
For tax purposes in the country, cryptocurrencies are treated as property under federal tax laws. This means that each time a company makes a sale of cryptocurrencies, it will pay a tax depending on how long it has held the cryptoasset and what its market value is at the time of the sale.
A crypto-friendly way out
Faced with this in the US, some cryptocurrencies prefer to operate in other countries. Among them is Malta. Known as one of the most crypto-friendly countries, this island has three laws for its regulation: The Digital Innovation Authority Act, the Innovative Technological Arrangement and Services Act, and the Virtual Financial Asset Act. In this country, taxes are paid according to the type of cryptoasset (coins and tokens) only if the transaction generated an income. In such a case, the percentage to be paid is 35%.
Other crypto-friendly countries on the list are Estonia, Singapore, Japan (where taxes vary from 15% to 55% depending on income), and Switzerland. In addition, Germany is considered a tax haven for these assets, since almost no activity or profit from them is taxed.
We also have El Salvador, where things are much easier for cryptocurrency accounting. According to the law passed in June 2021, there are no capital gains taxes for the exchange of bitcoins. This is possible because the country recognizes Bitcoin as legal tender, which is easily exchangeable for goods and services, and must be adopted by all those with the appropriate software to do so.
This means that all BTC accounting records can be made, but taking the USD as a reference for accounting purposes.
Accounting considerations for cryptocurrencies
Next, we will talk about some general considerations about cryptocurrency accounting, based mostly on the rules set by the United States. These can be quite similar to those of countries that have established taxes for cryptocurrencies.
Nevertheless, it’s necessary to take into consideration that each territory will operate with its own rules (and sometimes, as we have seen, these won’t exist). Therefore, you will have to do your own research (DYOR) about your locality.
Registration of cryptocurrencies in the ledger
If you are in the United States, when you buy a cryptoasset you must recognize it by registering a debit in the account with the market value. If the purchase was made with fiat currency, you must credit your cash account with the same amount. For the sale, you must do the opposite.
In case the amount in cryptocurrencies you own is higher than the amount reflected in the ledger, a credit can be recognized in a capital gains account, so there are no inconsistencies.
Transactions that should be included in equity measurements
Income from mining, staking, hardforks, airdrops, and interests constitute taxable events under financial reporting standards and will result in income taxes payable by the company. These taxes will be calculated around the fair market value at the time of acquisition.
They must be included in gross income for the year and will be treated as ordinary business income.
Cryptocurrency mining and trading activities
Mining activities must be recorded as any other income-generating activity. You should include both mining profits and maintenance and service expenses. Countries such as Russia, Venezuela, and Kazakhstan have started charging specific taxes on cryptocurrency mining.
In the case of trading, it should be recorded in the same way that stock trading is recognized. It should also be balanced from time to time by connecting the ledger to a capital gains or loss account, as the case may be.
What cryptocurrency accounting involves
Cryptocurrencies offer value exchange options never seen before. An increasing number of individuals, large, medium, and small businesses are using cryptoassets in their daily financial activities.
And, although cryptocurrencies such as Bitcoin are decentralized and global, the truth is that BTC accounting depends on how regulations are in the country where the person resides or the company is based.
The downside behind this is that cryptocurrencies are still the “elephant in the room” in many countries. As a result, they’re in a legal gray area, and many companies don’t know how to deal with cryptocurrency accounting in their specific cases.
Luckily, there is software on the market that takes companies by the hand in their cryptocurrency accounting process. From payment processors that record all capital inflows and outflows for periodic financial reporting, to private accountants specializing in the task, and software dedicated to tax and accounting tasks. You just need to ask for help if you need it!
Originally published at https://blog.alfa.cash on December 20, 2021.