Accounting for Digital Assets: Business Owner’s Guide

Nowadays, the global financial market is evolving rapidly with the evolution of digital assets. Unlike traditional financial systems, digital assets present companies with an opportunity to engage in transparent transactions in a more secure manner. This is because transactions with digital assets are recorded on a digital ledger with blockchain technology.

Businesses integrate different types of digital assets into their financial strategies such as cryptocurrencies, non-fungible tokens (NFTs), asset-backed tokens, and others. With this significant rise in investment in digital assets, understanding the basics of accounting for digital assets becomes crucial.

1. Understanding Digital Assets

Although the terms, “digital assets”, “virtual assets”, and “crypto assets”, are used interchangeably, they have different meanings. Understanding the difference between these terms helps with understanding how digital assets behave in the crypto environment.

According to the Financial Action Task Force (FATF), a virtual asset is a digital representation of value that can be digitally traded, transferred, and can be used for payment or investment purposes. Virtual assets are not representations of other financial assets like fiat currencies.

Crypto assets are a type of virtual asset. Crypto assets depend on cryptography and are also known as cryptocurrencies. These digital assets can be stored and transferred digitally via distributed ledger technology (DLT). DLT is a decentralized ledger network that allows the recording of transactions with high security and transparency.

If a virtual asset does not use blockchain technology, it cannot be classified as a digital asset. This is because digital assets refer to any asset that applies blockchain or a similar distributed ledger technology (DLT).

2. Types of Digital Assets

Digital assets can be categorized into several types based on their properties. The main types of digital assets available include:

01. Cryptocurrencies

Decentralized digital currencies operating on a blockchain like Bitcoin and Ethereum

02. NFTs (Non-Fungible Tokens)

Unique digital tokens that represent ownership of one-of-a-kind digital items such as digital art or music.

03. Stablecoins

Digital currencies that are pegged to stable assets like USD or gold to reduce volatility.

04. Tokens

Assets or utilities on a blockchain that enable ownership of both digital and real-world items like real estate.

05. Digital Bonds

A faster way to raise capital using blockchain technology compared to traditional bonds.

06. CBDCs (Central Bank Digital Currencies)

The digital versions of national fiat currencies that are issued by central banks.

It is essential to know how these digital assets function and what their tax implications are, in order to report transactions accurately. This is where digital asset accounting services come into play.

3. What is Digital Asset Accounting?

Just as with traditional currencies, bookkeeping for digital currencies is required within a business. In fact, it is more challenging to manage digital assets as they are volatile and have specific tax implications.

Digital assets are an innovation that has no specific International Financial Reporting Standards (IFRS). Therefore, tax compliance for digital assets requires experienced digital asset accountants’ services. Accountants specializing in digital asset accounting regularly assess IFRS rules associated with digital assets and ensure that your digital assets’ financial reporting is tax compliant.

4. Tax Compliance for Digital Assets

Crypto tax compliance and accounting are critical for businesses particularly because the IRS and other regulatory bodies release updates on digital asset taxes. These rules can vary from country to country.

There are different financial reporting standards for digital assets. One of the central requirements of digital asset accounting is that taxpayers must report all the income gained through digital asset transactions.

Different forms need to be filled out based on the type of digital asset transaction that you engage in. For example, if you receive a digital asset as compensation for services provided by your business, then you have to report the income on Form 1040 as with any other form of income.

However, if you dispose of a digital asset that was held as a capital asset, then you have to fill out Form 8949 and report the capital gain or loss on Form 1040. As you can see, recording each and every digital asset transaction for tax compliance can become quite overwhelming for business owners without the help of experienced crypto tax accountants.

Depending on where the transaction takes place, taxation differs. For instance, crypto is treated as an equivalent to cash in tax reporting within some states such as California and Kentucky. In Washington, digital assets like crypto are not subject to taxes.

These rules on digital asset taxation change with international developments. If your business engages in global operations, your digital asset accountant should have expertise in how digital assets are classified and reported across countries so that tax reports are accurate.

5. Strategies for Effective Tax Compliance of Digital Assets

A crypto tax accountant factors several things during crypto tax preparation. Identifying which financial events are taxable within your business is a key responsibility. This is owing to the fact that not every crypto transaction is taxable. Transactions like exchanging crypto for fiat currency or using it to purchase goods and services are generally taxable.

One of the most effective strategies for effective crypto tax compliance and accounting is the use of blockchain accounting tools to simplify the process of calculating gains and losses for crypto financial management. Calculating gains and losses accurately is essential for digital asset tax reporting. Using blockchain accounting tools is particularly helpful in cases where digital assets have been acquired over multiple transactions.

Strategies such as loss harvesting are applied by crypto tax experts so that crypto’s volatility can work to your advantage during tax season. This means that your digital assets are sold at a loss to reduce their overall tax liability.

6. Challenges with Accounting for Crypto Assets

By now, you are aware of how accounting for crypto assets is entirely different from traditional accounting. One of the key areas to focus on when it comes to accounting solutions for digital assets is the price volatility involved. Prices can change in a matter of hours. So, it’s difficult to maintain valuations when bookkeeping for digital currencies.

Another issue with crypto asset accounting is the lack of standardized practices for crypto assets. Therefore, companies are forced to create their own principles while adhering to the latest rules and guidelines put forth by the IRS. If your crypto tax experts are not updated on these guidelines, your business might end up facing tax compliance risks and even potential penalties.

Crypto assets also pose additional operational risks due to the nature of the currency in terms of cyber threats and fraud. In addition, since crypto assets are intangible assets that are investments, valuation is a complicated process.

Although accounting for crypto assets comes with certain challenges, cryptocurrency offers many advantages to a business to grow in the financial landscape. If your business uses digital assets, customers and business partners have more transaction methods to engage with your business that are faster and more transparent. Customers’ privacy is protected as personally identifiable information is not used and the transparency of the transaction increases your business’s accountability as well.

If you are a business owner thinking of expanding your financial options with digital assets, it is crucial to partner with professionals who specialize in digital asset accounting. They help your business establish a framework that ensures accurate crypto tax reporting by adhering to cryptocurrency accounting standards.

Your business’s digital asset management should be done in a way that benefits its financial future. Consult our team at OnChain Accounting today for expert guidance on digital asset accounting to grow your business confidently with digital assets while minimizing risks.

For further reading

Why Your Business Needs Digital Asset Accounting Services

Staying Crypto Tax Compliant with Professional Crypto Accounting Services

Accounting for Crypto Assets: Tax-Saving Strategies for Business Growth