Thinking about settling invoices smoothly using crypto? This guide equips you with the essentials of crypto accounting, ensuring easy invoicing with crypto.

Acctual's crypto accounting software solution is the key to exact crypto invoicing. Focusing on usability, accuracy, and efficiency, this tool is designed to simplify your financial processes, making it easier than ever to settle invoices using crypto.

Table of Contents

• What Is Crypto?

• What Are Crypto Assets?

• What Are The Rules For Crypto Accounting And Digital Assets?

• How To Account For Crypto

• What Are The Accounting Issues With Crypto?

• 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 Crypto?

Crypto is a digital token recorded using a distributed ledger infrastructure, often called a blockchain. These tokens provide various rights of use. Crypto is designed as a medium of exchange. Other digital tokens provide rights to use other assets or services or can represent ownership interests.

These tokens are owned by an entity that owns the key, which lets it create a new entry in the ledger. Access to the ledger allows the re-assignment of the ownership of the token. These tokens are not stored on an entity’s IT system, as the entity only stores the keys to the Blockchain (as opposed to the token itself). They represent specific amounts of digital resources that the entity has the right to control and whose control can be reassigned to third parties.

Related Reading

• Blockchain Payment Processing
• Crypto Bookkeeping
• Fiat To Crypto
• Fasb Crypto
• Crypto To Fiat
• Accounting For Cryptocurrency
• Crypto Payroll
• Bitcoin Merchant Account
• Get Paid In Crypto
• Crypto Wallet For Business
• Crypto Payment Processors

What Are Crypto Assets?

A crypto asset is a digital asset recorded as an asset on a balance sheet but not a physical asset. It covers both digital assets (like Bitcoin) and cryptographic assets. These assets rely on cryptography for security, utilize distributed ledger technology (often blockchain), and don’t require third parties like banks for issuance.

Crypto assets serve three primary purposes: 

• They can be treated as investments

• Means of exchange

• Means to access goods and services

While stablecoins are crypto assets, not all cryptocurrencies are crypto assets. They can also be categorized as tokens or assets held for future profit.

Crypto Invoicing and Payments: Acctual's All-in-One Solution

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 to learn about how you can pay bills and send invoices in crypto with our crypto accounting software today!

What Are The Rules For Crypto Accounting And Digital Assets?

Despite the unique digital nature of digital assets, there is currently no specific standard within the International Financial Reporting Standards (IFRS) framework that provides detailed guidance or requirements for treating stablecoins. Without specific guidance, differing interpretations and applications of the current IFRS framework have historically accounted for digital assets differently by entities.

Stablecoins as Intangible Assets or Inventory Under IFRS

In March 2019, an IFRIC agenda decision was published to confirm the accounting treatment of digital assets applying the current IFRS framework. Based on the nature and characteristics of stablecoins, the IFRIC agenda decision concluded that they do not meet the respective IFRS definitions of cash, cash equivalents, or financial instruments. It was confirmed that stablecoins may meet the definition of an intangible asset or inventory, depending on the circumstances.

Crypto Assets as Intangible Assets Under US GAAP

Similarly, the Financial Accounting Standards Board (FASB) issued a tentative decision in October 2022 that confirms that under US GAAP, crypto assets that meet a predefined scope should be classified as intangible assets and measured at fair value, regardless of the holder's intention.

Fair Value Measurement and Income Recognition for Crypto Assets 

The December 2022 tentative decision confirmed that the movement in fair value should be presented in net income under US GAAP and provided specific disclosure requirements applicable to crypto-assets.

Regulatory Challenges

Most digital assets now are decentralized, so no central bank or government controls the supply of coins/tokens on the market. This makes it very challenging for any government to regulate.

US Regulatory Landscape

The Securities and Exchange Commission (SEC) has started taking steps by claiming that various crypto offerings, such as Ripple, are investment securities and, therefore, must register with the SEC and adhere to SEC regulations. Also, since crypto can be used as a medium to purchase/exchange goods and services, the US Department of Treasury is trying to assess how to regulate some of these transactions. The States are also getting involved because each state has its banking regulations – some stricter than others.

Accounting for Crypto Assets

The emergence of digital assets raises novel accounting questions, many of which are just starting to be examined. Given the diverse range of stablecoins, the first step in the accounting analysis is to understand the characteristics, rights, and obligations relating to the respective holdings.

Due to the limited accounting guidance in this area and the industry's dynamic and evolving nature, crypto holders should monitor financial reporting developments.  

How To Account For Crypto

Digital assets are often considered intangible, particularly when held for investment purposes. Similar to other intangibles, like patents or trademarks, their value comes from the benefits they provide. As a rule, they are recorded at cost and measured at either cost or fair value, depending on the accounting standards followed.

Holding for Potential Appreciation (The Corporation Inc. Case)

For example, consider a scenario where a startup, let’s call it The Corporation Inc., purchases a substantial amount of Binance Coin, intending to benefit from potential capital appreciation. The company believes that over time, the value of Binance Coin will increase, resulting in a potential gain. In this case, the Binance Coin holdings resemble other investment assets like stocks or bonds. 

The company will record the initial purchase of Binance Coin at its cost, and subsequent changes in its value will be reflected on the income statement. If the value of Binance Coin increases, The Corporation Inc. might report a gain, but if the value decreases, a loss will be recognized.

Valuation Challenges

In some cases, stablecoins might be classified as inventory. This is especially relevant for businesses actively mining or trading digital assets. Like other inventory items, these assets are recognized at a lower cost or net realizable value. The challenge here lies in determining the appropriate cost basis for stablecoins, considering factors like mining costs and market fluctuations.

Sample Scenario: BitMiners

A mining company called BitMiners Ltd. actively mines Bitcoin using computer processes. The Bitcoin they get from mining is considered inventory because BitMiners' business is all about making new units of this crypto. It’s similar to a manufacturing company that keeps the materials and stuff it produces in its inventory. 

BitMiners tracks its Bitcoin inventory by examining its costs, including mining costs, like electricity and computer hardware maintenance. It also considers Bitcoin's current market value—how much it could be sold for. If the value drops significantly, BitMiners might have to say it lost some value in its Bitcoin inventory.

Accounting for Crypto Payments

If your company uses crypto to pay a vendor or contractor, the transaction will be recorded like a sale. If the asset appreciates in value and you use it to pay a vendor, you would recognize a capital gain. Again, the time the crypto has been held will determine the capital gains tax required.

For that reason, using crypto for regular transactions requires carefully recording each transaction and compiling that information to account for impairments and gains correctly. So companies need accounting processes to track crypto assets, their cost basis, how long they have been held, any impairment, and transaction fees. If your company is using crypto for payments, it should be stored in a separate wallet from crypto assets that are being held to appreciate in value.

Crypto Classification and Accounting Impact

As you can see from the examples above, crypto’s classification influences how it is reflected in financial statements. As intangible assets, stablecoins are initially recorded at cost (i.e., the price they were bought for). Later, their value is adjusted by subtracting amortization over time (if any) and losses due to value drops. Any increase in value after a drop is considered income. 

But if their value goes down, that loss is recognized right away. Digital assets classified as inventory are recorded at lower cost or net realizable value. The cost includes direct expenses (like mining) and an appropriate portion of overhead expenses. Any reduction in value is recognized as an expense. Digital assets for transactions are measured at their fair value. Changes in their value might impact the income statement, reflecting gains or losses.

What Are The Accounting Issues With Crypto?

Volatile Nature of Crypto Values

Unlike traditional currencies, digital assets exhibit inconsistent price movements. They can skyrocket or plummet within seconds, making evaluating and recording transactions difficult. This tends to significantly impact financial reports and balance sheets.

Lack of Standardized Accounting Principles

Unlike traditional finance, the decentralized nature of stablecoins has given rise to the absence of universally accepted accounting principles. This results in various accounting practices across the crypto landscape, leading to inconsistencies and challenges in comparing financial statements.

Transaction Volume and Automation

The high transaction volume of stablecoins can overwhelm manual and semi-automated accounting methods. Specialized accounting software capable of handling the swift pace and volume of crypto transactions is essential for accurate real-time recording and categorization.

Security and Safeguarding Digital Assets

Stablecoins' digital nature exposes them to hacking and cyberattacks, posing potential risks of losing valuable assets. Security is a significant concern in crypto accounting, necessitating robust measures to protect digital holdings. This complexity requires accountants and financial professionals to ensure secure storage while maintaining accurate records.

Effortless Crypto Invoicing and Payments 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 to learn about how you can pay bills and send invoices in crypto with our crypto accounting software today!

Related Reading

• Blockchain Billing
• How To Send Crypto
• Crypto Accounts Payable
• Crypto Treasury Management
• Crypto Auditing
• Crypto Compliance
• Crypto Payment Gateways
• Blockchain For Accounting
• Crypto Recurring Payments
• Crypto Escrow
• How To Accept Crypto Payments As A Business
• Crypto Invoicing

Crypto Tax Filing In The US

Taxable vs. Non-taxable Events

You won’t have to worry about tax implications in certain scenarios, such as: 

Buying and Holding Crypto

You're in the 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.

Donating or Receiving Crypto as a Gift

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.

Transferring Crypto 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

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 accordingly.

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. It’s essential to 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.

Related Reading

• Fractal Crypto Alternatives
• Request Finance Alternatives
• Cryptoworth Alternatives
• Bitwave Crypto Alternatives
• Bitpay Alternatives
• Best Crypto Accounting Software
• Bitwage Alternatives
• Cryptio Alternatives
• Integral Crypto Alternatives
• Mural Alternatives
• Tres Finance Alternatives
• Ledgible Alternatives

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 to learn about how you can pay bills and send invoices in crypto with our crypto accounting software today!