Accounting for cryptocurrency can be difficult. In this blog, we’ll walk you through a complete guide on accounting for cryptocurrency.

Acctual's crypto accounting software solution is the key to simplifying your crypto accounting needs and ensuring a smooth process when paying invoices through crypto.

Table of Contents

• What Is Accounting for Cryptocurrency?

• Classification Of Cryptocurrencies In Accounting

• How Is Investment In Cryptocurrencies Accounted For Under Current Guidance?

• Typical Challenges In Accounting For Cryptocurrencies With Current Accounting Standards

• Crypto Tax Filing In The US

• Pay Your Bills In Crypto With Our Crypto Accounting Software Today － Book A Demo To Learn More

What Is Accounting for Cryptocurrency?

Accounting for cryptocurrency is the process of recording all crypto transactions into organized accounts regularly. It guarantees that records of any blockchain activity are accurate, complete, and up-to-date. Each type of crypto transaction must be properly recorded, whether related to trading, staking, or providing liquidity.

The arrival of digital assets has changed the finance industry. As a result, traditional accounting standards such as GAAP and IFRS are being reexamined and applied differently. For companies in this space, understanding the accounting principles for digital assets isn’t just a matter of compliance—it’s an opportunity to gain an edge. Thus, businesses are forced to approach crypto bookkeeping on a case-by-case basis.

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Classification Of Cryptocurrencies In Accounting

In accounting, the classification of digital assets is a consideration. As per an IFRIC agenda decision from March 2019, digital assets, like Bitcoin and Ethereum, don't neatly fit into the existing IFRS definitions of cash, cash equivalents, or financial instruments.

How are these digital assets classified for accounting purposes? The IFRIC agenda decision clarifies that digital assets, depending on their context, will likely fall under either an intangible asset or inventory.

Inventory Classification for Resale

Under IFRS, a business holding a crypto to sell in the ordinary course of business should be treated as inventory under IAS 2 Inventories. Essentially, inventory is measured at lower cost and net realizable value.

Broker-Trader Inventory Valuation Exception

Broker-traders who buy or sell digital assets on behalf of others (or themselves) are an exception to this rule. They can measure their inventories at fair value and at a lower cost to sell. These broker-traders often aim to profit from the price fluctuations of digital assets or their associated margins.

US GAAP Classification and Fair Value Measurement

Under US GAAP, digital assets that meet a specific scope should be classified as intangible assets and measured at fair value, irrespective of the holder's intent. As confirmed in a December 2022 tentative decision, the changes in fair value should be reflected in net income, with stringent disclosure requirements for crypto-assets.

Simplify Your Crypto Accounting with Acctual

Acctual is crypto accounting software for businesses and freelancers transacting in digital assets. It simplifies accounts payable and receivable, making it easy to pay bills and send invoices in crypto. Our flexible options let you pay in crypto while vendors receive fiat, receive crypto while clients pay in fiat, or receive fiat while clients pay in crypto. We also integrate with your accounting system, saving you time on month-end reconciliation.

Key features:

• Multi-level approvals for bills

• Fiat-to-crypto and crypto-to-fiat payments

• Built-in AML screening

• Crypto invoice links

• Automatic payment notifications

• With our smooth AP/AR process, automated bookkeeping, built-in internal controls, and flexible payment options, you can simplify your financial operations with us.

Book a call with our team today to learn how you can pay bills and send invoices in crypto with our crypto accounting software!

How Is Investment In Cryptocurrencies Accounted For Under Current Guidance?

Crypto investment is an intangible asset under both IFRS and US GAAP. In most instances, it does not meet the definitions of other asset classes, such as:

• Cash

• Cash equivalents

• Financial instruments

• Inventories

Companies following IFRS can account for crypto assets at cost less impairment or fair value less impairment (revaluation model) under IAS 38. Companies following US GAAP must carry crypto assets at cost, as US GAAP does not have a revaluation model for intangible assets.

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Typical Challenges In Accounting For Cryptocurrencies With Current Accounting Standards

Value Fluctuations

Digital assets are popular for their significant value fluctuations, challenging accountants to track and report their fair value accurately. Countries lack standardized regulations for treating digital assets, further complicating their stability.

Recording losses and gains

US GAAP rules dictate that only losses, not gains, are recorded when accounting for cryptocurrencies. This discrepancy can make it challenging for accountants to keep accurate records and maintain financial statements when information on profits is often missing.

Intangible Asset Reporting

Under IFR and GAAP, digital assets must be reported as intangible assets with indefinite lives. While this presents its own challenges, particularly in accurately reporting losses when the price drops below the value, digital assets’ volatile nature only adds to the complexity.

Identifying Market Value

Due to digital assets’ volatile nature, determining and tracking their market value can be challenging and time-consuming. Discrepancies in crypto prices across different exchanges further complicate the matter, making it difficult for accountants to identify a fair approach to calculating prices accurately.

Crypto Tax Filing In The US

Taxable vs. Non-Taxable Events

Holding Without Tax Implications

You won’t have to worry about tax implications in certain scenarios. For example, you're clear if you buy crypto with cash and simply hold onto it. Taxes only come into play when you decide to sell your crypto assets.

Tax-Exempt Crypto Donations and Gifts

When you feel charitable and donate crypto to qualified charities or receive it as a gift, you usually won’t face immediate tax obligations. If you eventually decide to sell the crypto you received as a gift, you might need to consider taxes.

Transfers Between Your Own Wallets

Another situation that doesn’t trigger tax obligations is when you transfer crypto between your wallets or accounts that you personally own. In this case, you can maintain your original cost basis without worrying about immediate tax consequences.

Taxable as Capital Gains

When it comes to taxes, certain crypto transactions fall under the category of capital gains. For instance, you'll owe taxes on those gains when you sell your digital assets for cash and make a profit – meaning the selling price is higher than what you initially paid. Conversely, if you sell at a loss, you might be eligible for tax deductions.

Even exchanging one crypto for another is considered a taxable event. So, if you profit during the conversion, you’ll owe taxes on those gains. It’s important to remember that using your crypto to make purchases, like buying goods or services, is treated similarly to selling the asset. This means it’s subject to capital gains taxes as well.

Taxable as Income

When you receive crypto as payment from your employer or in exchange for goods and services, it’s important to recognize that these transactions are treated as income. This means you’re obligated to report your taxes to them.

Mining or earning staking rewards is another area where tax considerations come into play. Any income generated through mining or staking is subject to taxation, which is determined based on the fair market value of the coins you received when you received them. Keep track of these earnings for accurate tax reporting.

Reporting Crypto Taxes to the IRS

Correctly reporting crypto taxes to the IRS is crucial for maintaining compliance and avoiding penalties. The following steps outline the process of calculating and reporting crypto taxes:

Calculate the Cost Basis

Determining the cost of each crypto asset or the fair market value in USD on the day it was acquired.

Identify Taxable Transactions

Based on IRS guidelines, classify each transaction as either a capital gains tax event or an income tax event.

Calculate Capital Gains and Losses

Determine the capital gains or losses from every crypto disposal, separating short-term and long-term gains. Calculate the net capital gain or loss.

Report Crypto Income

Identify the fair market value of any crypto income received in USD and report it accordingly. Use Schedule 1 for income tax reporting or Schedule C for self-employed individuals and businesses.

File the Tax Forms

Prepare and file the necessary tax forms, such as Form 1040, Schedule D, Form 8949, and any required documents based on your circumstances.

Using crypto accounting software to simplify calculating and reporting crypto taxes is recommended.

Pay Your Bills In Crypto With Our Crypto Accounting Software Today － Book A Demo To Learn More

Acctual is crypto accounting software for businesses and freelancers transacting in digital assets. It simplifies accounts payable and receivable, making it easy to pay bills and send invoices in crypto. Our flexible options let you pay in crypto while vendors receive fiat, receive crypto while clients pay in fiat, or receive fiat while clients pay in crypto. We also integrate with your accounting system, saving you time on month-end reconciliation.

Key features:

• Multi-level approvals for bills

• Fiat-to-crypto and crypto-to-fiat payments

• Built-in AML screening

• Crypto invoice links

• Automatic payment notifications

• With our smooth AP/AR process, automated bookkeeping, built-in internal controls, and flexible payment options, you can simplify your financial operations with us.

Book a call with our team today to learn how you can pay bills and send invoices in crypto with our crypto accounting software!

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