The past decade has seen the dramatic rise of cryptocurrency. As it becomes less of a fringe asset and more of a mainstream tool, crypto is becoming more and more attractive both for companies and their executives.
Whether through accepting crypto as payment, purchasing it as an asset, or simply considering its future use, properly accounting for cryptocurrency can be a complex topic.
As a relatively new asset class, in part due to its volatility, cryptocurrency can turn into a complicated accounting topic.
From a financial reporting perspective, crypto holdings need to be considered on the company balance sheet as intangible assets subject to impairment. For tax purposes, the IRS doesn’t currently consider cryptocurrencies as currency for tax purposes, but rather as listed property, which should be treated similarly to stock. Simply put, there are differences in how digital assets are treated for financial reporting purposes and tax purposes and it’s messy.
Hopefully, by now you no longer believe the myths that crypto holdings and transactions are somehow tax-exempt or fall under special tax rules. They aren’t and they don’t.
Quite the opposite, actually. Gifts and airdrops count as income, and any gains generated from buying or selling are taxable gains. As far as the IRS is concerned, free money doesn’t exist.
As such, it’s crucial that you are able to account for every trade, which makes it all the more important to do everything possible to ensure that you’re keeping detailed cryptocurrency records.
However, if you’ve done any amount of trading or investing, you’re already aware of how difficult this tracking can be and have been asking yourself how you can simplify your crypto accounting.
Generally speaking, there are two ways to accomplish this:
While both are good options in their own right, it’s best when used together. More on that later.
Most companies and individuals doing anything with crypto have multiple wallets and multiple accounts (i.e. with Robinhood, Coinbase, Binance, etc). But due to the nature of crypto, its volatility, and the “offline” storage and transfer options, the tools available on these exchanges aren’t designed to do your accounting on their own.
Especially if you’re doing any kind of volume buying, selling, or accepting cryptocurrency, tracking transactions manually can be a nightmare. You’ve got to keep track of how you spend your crypto assets, when and how you convert them, and how much the coins are worth at the time of the transaction.
Trying to handle all of that tracking manually can be extremely confusing. You need an automated tracking system to keep track of your transactions and transfers in real-time.
Fortunately, a variety of excellent tools designed to do just that have sprung up over the past few years.
The best cryptocurrency tracking tools:
For this purpose, Founders CPA prefers Cointracking.info. It’s an accounting software solution that lets you analyze trades and generates real-time profit & loss reports, among other things.
Furthermore, because it tracks everything related to the coins (buying price, selling price, holding period, etc), it helps businesses calculate their cryptocurrency tax obligations with ease.
Simplifying your crypto accounting can also be accomplished by handing the topic off to a qualified partner.
Some CPA firms, like Founders CPA, have deep knowledge and understanding of cryptocurrencies and crypto accounting. Because they specialize in the topic, they also keep up with the current rules and regulations from a tax perspective. This means when it comes to tax time, they’ve got your bases covered.
A specialized accounting partner is able to:
As we discussed above, handling cryptocurrency taxes can be a very complex topic. The IRS (and other global tax authorities) are working constantly to stay up to speed on all things related to blockchain and cryptocurrency.
This means the tax and regulatory environment is constantly changing. In addition to the tax laws being updated every year, the level of information the IRS receives from the exchanges grows as well. Especially as they seek to meet SEC compliance requirements and achieve IPOs.
Furthermore, the IRS is very much aware that many companies and individuals have generated immense gains through their cryptocurrency holdings in the past decade. Without detailed records of your crypto holdings and transactions, these people and companies can end up on the hook for massive tax bills.
Even if you use a robust software solution like Cointracking.info, having a CPA firm in your corner that truly understands crypto can be a major help. The software is only useful if you know how to use it and verify the accuracy of the data it reports on.
It’s a new field with new-ish technologies and tax regulations that aren’t entirely caught up. It’s best to have a professional looking over your shoulder.
Otherwise, you run the risk of unknowingly reporting something incorrectly or even fraudulently – which can generate significant penalties.
Cryptocurrency is an exciting new space. We’ve seen many people and businesses generate significant gains over the past decade or so. So wanting your business and personal finances to include some cryptocurrency is perfectly understandable – either by investing as a store of value or by starting to accept cryptocurrency as payment.
On the other hand, it’s a complicated field, especially from a tax and accounting perspective. At a minimum, you should be using an automated software solution to handle the tracking and reporting of your crypto holdings and transactions.
At best, you’re using an automated software solution coupled with a professional accounting service. Someone like Founders CPA, who specializes in cryptocurrency topics, can make your life easier by ensuring that you’re well informed about your holdings and obligations and that you’re strictly following the tax laws.
If you’re thinking about getting involved in cryptocurrency, get in touch with us so that we can help you minimize the stress associated with crypto accounting.