Cryptocurrency is rocketing to the forefront. When so many are purchases are made electronically, why wouldn’t currency follow and evolve? But today, many businesses are still trying to answer the question, how does basic accounting and cryptocurrency intersect and how can you protect your totals?
Before we discuss a new monetary system, we should clarify. Investopedia defines cryptocurrency as a digital or virtual money (currency) using cryptography for security. Many cryptocurrencies are decentralized systems based on blockchain technology. The separated network of computers supplying the random, required information serves to protect against hacking, counterfeiting or illicit transfers.
Bitcoins are the most frequently used form of cryptocurrency, but there are many currencies in use worldwide. The United States Government put some cryptocurrency guidelines in place that can be useful, regardless of where the currency is used. Banks are not needed to move Cryptocurrency, so it is viewed more like gold than issued money. Bitcoins and other currencies have an assigned value at the time of purchase. At the time of writing, 1 bitcoin is equal to $10,863 USD, up over $2,500 in the last thirty days.
Value for Bitcoin seems to constantly fluctuate, as may other cryptocurrencies, so accounting might seem confusing.
For federal tax purposes, The IRS in notice 2014-21 has specified that cyber currency (such as Bitcoin) is considered property, not currency. The same tax principles that apply to property apply to cryptocurrency.
- Cryptocurrency is NOT treated as currency to determine losses or gains
- Taxpayers MUST include the fair market value of the virtual currency as taxable income when used to pay for goods or services
- The fair market value is determined as of the date acquired; it is (virtually) digitally exchanged for US dollars for tax purposes.
- As a taxpayer, you may have a virtual loss or gain. If you acquired/received Bitcoins on June 1, 2019, when Bitcoins were valued at $8558.95 USD; today, you will have realized a gain of $2,304.15 USD per bitcoin.
- An Accountant must choose a valuation strategy for regulatory compliance when Bitcoins are accepted as income. The income must be placed on the schedule C or 1120 form, to be reduced by business expenses throughout the year.
It is an imperative accounting practice to record the value of the cryptocurrency at the time you receive it, and at the time you “spend” it. The amount of tax you pay on cryptocurrency changes, depending on how long you held the investment. If, for instance you sold the coins you bought June 1st for $8,865 at today’s high of $11,000 your $2,135 gain would be subject to short-term capital gains tax. Long term capital gains are treated much differently by the IRS.