Cryptocurrencies and Bitcoin are getting more popular day by day. Around the world, news, articles, television commercials, and much more places, are all filled with intangible assets (BitQt). We do see financial advertisements on billboards and commercials, but it is creating a unique impact in all industries like sports, art, music, gaming, and many more areas. In this article, we will look at how cryptocurrencies are recorded in accounting and how they work and are managed in the world of crypto.
One of the most popular cryptocurrencies is Bitcoin, and it is floating everywhere around the world, besides Bitcoin now there are more cyber-currencies like Namecoin, Hashcoin, and Beertoken, but Bitcoin is the most persistent digital currency, so we will be focusing on how to handle the accounting function of Bitcoin.
Before Proceeding to the central theme, let us discuss what Bitcoin is:
What are Bitcoins?
Bitcoin is one the most popular and frequently used digital currency, and it is created with the help of complex mathematical equations while policed by tons of traders called the ‘miners.’ They are long threads of computer code that contain a cash value and bypass traditional banks through crypto transactions.
Bitcoin work by online transfer from one wallet to another and is stored on a computer, mobile, or in the cloud as there is no banking system for a transaction or storing it.
It has multiple advantages and Disadvantages that are mentioned below:
Some advantages of using Bitcoin:
- Bitcoin is decentralized, so no banking system or governmental body is needed.
- These are non-regulated intangible assets.
- No need for Transaction fees from third parties.
- It is used in purchasing any business, Item, product, or service that accepts Bitcoin as payment.
Disadvantages of using Bitcoins:
- All assets can be lost if hacked.
- Avoiding financial scrutiny from the government for tax.
- Stored Bitcoin is considered vulnerable resulting in the depreciation of assets.
Accounting for Cryptocurrency:
In general, the IRS treats crypto as property for income tax purposes. Therefore, it means that transaction rules for these assets are similar to the rules of the barter transaction. Recently, the U.S Commodity Futures Trading Commission, crypto is utilize as a commodity may cause some variation in the future ruling of the IRS.
Accounting for these intangible assets may seem complex and confusing, but hopefully, this article gives some idea about the operation of accounting for Bitcoin. We will look at some of the guidelines the US has placed for a particular direction.
For federal tax purposes, Bitcoin and other trading assets are considered property, as mentioned. Tax and accounting principles that apply to this property are mentioned below:
- Since Cryptocurrency is considered as currency rather than a property to find out the losses or gains under the tax laws.
- Fair market value by the taxpayers for these assets is considered taxable income when they are utilized to pay for their goods and services.
- The fair market value is determined by the date it was received.
- As a taxpayer, it can lead to virtual loss or gain. For instance, purchasing Bitcoin when they are peak means losing their assets.
- Accounting services just need to ensure that when you accept Bitcoin as your income, they must select a valuation strategy on the desired schedule C or 1120 form and ultimately deplete by business expenses around the year to decrease the risk of accounting and tax problems.
Applications for Cryptocurrency Management:
These intangible assets do not fit directly into the account software boxes. Moreover, they can easily be tracked with the help of trading platforms such as Coinbase or Gemini. Some companies like Libra Tax develop their own software for digital currencies that helps them to keep a record of the data that is linked with the IRS.
Steps Ensuring Accounting Practice Resulting Optimization of Cryptocurrencies
Here are some of the steps that can be taken to ensure your accounting operation results in the optimization of cryptocurrencies listed below:
- Must follow all the regaultions with respect to payroll and tax reporting regarding payroll withholding and tax reporting for those who have been paid in terms of cryptocurrencies.
- They are receiving incoming in crypto form for goods, services, or monthly wages, report accurately on tax return Schedule C. This list included where the traders list down their business revenues and payments.
- For instance, if you are buying crypto for investment purposes, utilize those assets as capital assets rather than for your personal use.
Since intangible assets are a little bit complex to understand and may result in scams, if you are looking for trading, you need trustworthy software like bitcoin trading software which makes your trading and accounting much safer.