It's a brave new cyber world that we live in, one where virtual currency exists to exchange and pay for things globally. Certainly, this throws a whole new monkey wrench into basic accounting platforms and raises a few questions. How is cryptocurrency handled by a bookkeeper, and just what in the world is it anyway? Here is the definition of cryptocurrency from Techopedia:
Cryptocurrency is a type of digital currency that is based on cryptography. Cryptocurrency uses cryptography for security, making it difficult to counterfeit.
In no way are Bitcoins the only cryptocurrency floating around on the Internet; in fact, there are dozens of other cyber-currencies, like Namecoin to Hashcoin, even Beertoken. However, Bitcoins are the most frequently used form of this new digital money, so we'll focus on it and how to handle accounting functions that involve them.
What are Bitcoins?
Bitcoins are electronic currency -- digital public money -- and are created using complex mathematical equations, while being policed by millions of users called 'miners'. Basically, they are long strings of computer code that have a cash value, and completely bypass traditional banks. They are very controversial because they are unregulated and banks, governments and law enforcement agencies have not figured out what to do about them.
Though Bitcoins and other cyber-currencies are used worldwide, some of the guidelines that the United States government put in place are useful. At this point, Bitcoins are passed from one online wallet to another, and stored on a computer, smartphone, or in the cloud. Since banks are not needed to move the money or to store it, they are more like gold nuggets than real money. They have an assigned value at the time of purchase; for instance, as we were writing this, the price is about $403 per Bitcoin, down considerably in the last few days.
Accounting for Bitcoin
Accounting for Bitcoins might seem a little confusing at first. Again, we can look at some guidelines that the US has put in place to deal with them for direction:
For federal tax purposes, Bitcoins and other cyber-currency is considered property. Tax principles that apply to property apply to them.
- Cryptocurrency is NOT treated as currency to determine losses or gains under tax laws.
- Taxpayers MUST include the fair market value of the virtual currency as taxable income when it is used to pay for goods or services.
- The fair market value is determined as of the date acquired; basically it is (virtually) exchanged for U.S. dollars for tax purposes.
- A taxpayer can have a virtual loss or gain; for instance, if they bought the Bitcoins when they were at their peak of $1000 or so, they would have a loss.
- Accounting services simply need to keep in mind that for regulatory compliance when accepting Bitcoins as income, they must choose a valuation strategy, place them on the Schedule C or 1120 Form, and reduce by business expenses throughout the year.
Of course, the most important accounting practice is to record the value of the cryptocurrency at the time you receive it, and at the time you “spend” it. In this way, you can accurately calculate gains and losses.
Whether you're venturing into the world of cryptocurrency--or simply need help sorting out traditional accounts receivables, we have an accounting and bookkeeping service expert that can help.