Please check out latest news, expert comments and industry insights from Coinspeaker's contributors.
As crypto acceptance grows and new challenges and obstacles occur, changes in legislation are expected to continue.
Many are oblivious to or simply confused about the existing requirements for reporting and paying taxes on cryptocurrency transactions, which makes navigating this new frontier extremely difficult.
If your company is looking to be on the vanguard of adopting crypto in its business transactions, this article aims to give an overview of the key accounting considerations that businesses should make when planning to take that leap.
The Legality of Crypto for Businesses
Using cryptocurrencies as a business currently has one clear disadvantage: the regulatory environment is unreliable. It’s necessary to learn crypto trading for successful trading, but in truth, this is a process that never ends due to the ever-changing market climate. The crypto landscape is constantly transforming and, of course, the same goes for institutional regulations, which are likely to alter in the near future.
Regulations to control crypto transactions (including rules on how digital assets should be reported in taxes) are still being drafted by legislators, and they will almost certainly continue to develop after they are in place, forcing company owners to keep track of these updates and adjust accordingly.
Therefore, as crypto acceptance grows and new challenges and obstacles occur, changes in legislation are expected to continue.
Present Regulations for Crypto Accounting
Given that there is no exact timeframe regarding when to expect new official regulations, let’s discuss how companies can do bookkeeping for their crypto holdings and transactions right now.
Recording Crypto Mining Activities
To record mining income properly, you should debit the newly obtained coins to your books at their fair market value and credit your mining income account. If you’re paying for your mining activities with cash, you should credit your cash account and debit either an asset (e.g. when purchasing mining equipment) or an expense (e.g. utilities and supplies).
Note that any profits from your mining activities should be recorded as they are earned.
Recording Crypto Payments to Suppliers
If a supplier wishes to be reimbursed for their goods or services in cryptocurrency, the payment your company makes to their account should be recorded in the same way that you would record selling the cryptocurrency.
This transaction would be classified as a disposal and therefore recorded as a capital gain due to the difference between the book value of the asset and what you have paid out.
Recording Crypto Trading Activities
Trading activities should be reflected on your ledger in the same way you would record revenue generated through stock trading.
If you buy crypto tokens using your credit or debit card, i.e. fiat funds, you should record the investment on your books by crediting your cash account and debiting your crypto asset account. Additionally, debiting your loss account and crediting your asset account must be properly journaled to account for any impairments if and when they take place.
Crypto Accounting and Tax Reporting
All of the activities listed below are considered taxable events and are taxed as regular business income that should be included in your yearly gross revenue:
- income generated through mining;
- income generated through interest-earning;
- income generated through crypto staking;
- income gained by way of AirDrops or hard forks.
Integrating Crypto with Your Business
There are two viable ways of adopting a more comprehensive use of crypto in your business model.
The first one is using a third-party provider or custodian that keeps your crypto safe on the blockchain, and to get wallet management services that make tracking and valuing the digital assets much easier and more streamlined.
The second one is incorporating crypto into your company’s operational infrastructure and keeping track of the private keys in-house.
A third-party provider or asset custodian is used by the majority of corporations that are now adopting crypto in a “hands-on” manner.
Managing Crypto Assets with Digital Wallets
An appropriate digital wallet structure is necessary for effective cryptocurrency management by your treasury, if you opt for a more hands-on approach.
While “cold wallets” are best suited for long-term storage, “hot wallets” are essential for a variety of additional reasons. Thus, it’s important to select an appropriate crypto wallet, with the Trust Wallet probably being the most reliable choice and allowing you to store many different cryptos.
Such wallets can, for example, collect data about the current status of a cryptocurrency for immediate operational use. They also aid in predicting the various uses to which a currency will be placed. Most importantly, “hot wallets” assist the treasury in determining or adjusting the appropriate crypto allocations on a regular basis.
Simplifying Crypto Bookkeeping Processes
Here are some simple and straightforward ways you can simplify the process of accounting for crypto at your company.
Quality Accounting Software
Cryptocurrency reporting software, that connects with cloud accounting solutions, may drastically cut the time it takes to manually gather, categorize, and input data, as well as minimize the risk of human error.
The best crypto accounting tools should be able to synchronize your crypto transaction data with as many exchanges as possible, and should also have the option of generating reports for taxes, profits and losses.
The best such tools to choose from include:
Whether you require tax preparation services related to your crypto transactions, or you simply wish to have a bookkeeping professional versed in digital currencies to assist your accounting department in their operations, hiring a crypto-certified public accountant (CPA) may just solve the majority of your crypto accounting problems.
Echoing everything we have covered in this article, a professional crypto CPA should be familiar with current tax laws, and be able to keep up with and explain the IRS’s general strategy and approach to cryptocurrencies.
Keeping Records of All Activity
Keeping records of every single crypto-related transaction or cost is the most effective way to contribute to effective cryptocurrency accounting.
Luckily, there are many trusted third-party apps that can be integrated with your digital accounting tools and be utilized to expedite or automate the data collecting process. It is also critical to keep track of any crypto-related receipts using reliable invoice management software.
Cryptocurrency accounting may be difficult to grapple with at first, but with the right attitude and patience to wait for more precise and standardized legal guidelines, you will be able to incorporate cryptocurrency into your company’s balance sheet and join the likes of many other companies who have successfully done the same.