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If you are new to running a business and haven’t explored cryptocurrencies yet, you are missing out on some exciting opportunities. Crypto assets are a gem for business growth, helping professionals take their companies to the next level in ways that once seemed impossible. Being digital currencies powered by blockchain technology with more flexibility and innovation than any other monetary unit, cryptocurrencies are quickly becoming a shining star in the business world.
Unlike traditional currencies, cryptos aren’t controlled by governments or financial institutions. Thanks to cryptography, each transaction is secured with a traceable digital code. By offering greater security and transparency, these digital currencies are revolutionizing the way transactions are handled across the globe.
Curious about how to manage cryptocurrency transactions in your business? By understanding how to maintain your digital currency records with crypto bookkeeping, your business can tap into new growth avenues in confidence.
This guide delves into what crypto bookkeeping is and offers insights into how your business can integrate crypto assets into its finances while maintaining traditional finances effectively.
1. Crypto Basics for Beginners
Beginners in the world of crypto often have many questions about what cryptocurrency is and how it works. Simply put, cryptocurrency is digital money that works with blockchain technology.
At this point, you might be curious about what blockchain technology actually is. The key terms you need to remember about blockchain technology when it comes to understanding crypto are,
- Blocks: Blockchain is a chain of blocks. In blockchain accounting, every time a crypto transaction occurs, a new block is created with a cryptographic hash to link it to the chain holding all the blocks.
- Mining: During this process, miners validate crypto transactions by updating the blockchain with new blocks and coins. You can receive cryptocurrencies as payment for mining.
- Nodes: A node is a computer that has access to the blockchain. All computers that run the crypto database form the nodes in the blockchain.
Now that you know the key terms in blockchain technology, it’s easy to see the logic behind the use of blockchain technology in cryptocurrency. Blockchain is a secure way to protect financial information for crypto transactions as there is more transparency with public records.
2. What is Crypto Bookkeeping?
Crypto bookkeeping is the process of managing cryptocurrency transactions for your company. This is very similar to traditional bookkeeping where all financial transactions made by a business are recorded.
The only difference is that crypto accounting methods are different from conventional currencies as cryptocurrencies are considered to be “property” by tax authorities making each transaction a taxable event.
The FIFO (First In, First Out) accounting method is used for crypto in the United States as per IRS regulations. Crypto tax services help you choose the most effective tax accounting method to reduce your tax liability.
Hiring cryptocurrency bookkeeping services is highly advantageous in the long run. It ensures that your crypto financial records are fully compliant with IRS regulations, while also optimizing your business’s profitability.
3. Main Components of Crypto Bookkeeping
Crypto tax professionals follow several steps in the digital bookkeeping process to ensure that your business’s capital gains or losses are recorded accurately. If financial reporting is not done systematically, your company may have to face penalties.
Since cryptocurrencies are decentralized and volatile, crypto accountants use a specialized approach to navigate tax rules and minimize financial risks.
Transaction Tracking
Whether you are buying, selling, trading, or receiving payments, each and every cryptocurrency transaction has to be recorded for tax preparation. Details such as the date of the transaction, amount, and any fees are recorded.
Valuation of Cryptocurrencies
Cryptocurrencies fluctuate in value. The value of cryptocurrency depends on the concentration of ownership, essentially the supply and demand. Bookkeeping for digital currencies requires accurate valuation at the time of each transaction for tax calculations.
Tax Compliance
Crypto transactions trigger capital gains or income taxes depending on how the cryptocurrency is used. For example, if you receive cryptocurrency as payment, it counts as income but if you trade crypto, it results in capital gains or losses. Specialized crypto accounting services are needed to make sure that local crypto tax laws are followed.
Accounting for Digital Currencies
Digital currency transactions should be synced with overall financial reporting. You need an accounting firm that combines digital bookkeeping and traditional financial reporting to provide clear insights into your company’s crypto activities.
4. Why are Cryptocurrency Bookkeeping Services Important for Your Business?
As your business grows and you make a huge leap toward modernizing your financial records with digital assets such as cryptocurrencies, the excitement of it all might make you forget that crypto is a virtual currency that requires bookkeeping like all other currencies.
You need to keep in mind that cryptocurrency transactions are decentralized unlike traditional transactions with anonymity over the identity of crypto miners. So, digital bookkeeping is no easy task.
The highly volatile market conditions for cryptocurrencies cause the value of crypto assets to change frequently too. Therefore, crypto tax accountants need to make constant adjustments to bookkeeping records.
By hiring cryptocurrency bookkeeping services, you can make sure that the financial threats posed by crypto activities are minimized as crypto tax professionals are experienced with handling these financial situations better than your in-house accounting team.
5. Best Practices Used by Crypto Tax Professionals for Bookkeeping
Digital assets like crypto are decentralized and highly volatile by nature. Therefore, maintaining accurate financial records of cryptocurrency transactions in an organized manner can be challenging. Businesses usually get the assistance of expert crypto tax professionals to ensure that their crypto bookkeeping remains compliant.
Your business has to reconcile cryptocurrency transactions regularly with bank accounts, wallets, and exchange records as a best practice to ensure that all transactions have been accounted for.
If you hire crypto tax professionals to collaborate with your in-house accounting team, you don’t have to worry about any discrepancies with tax preparation. This is mostly because experienced crypto tax professionals are always up-to-date on the latest regulations surrounding cryptocurrency. Therefore, you can make sure that your tax preparation remains compliant.
Crypto tax professionals also make sure that each and every crypto transaction is recorded as it may easily become a taxable event with crypto activities being recognized as property under IRS regulations.
Since expert crypto tax professionals apply best practices in crypto bookkeeping, you can focus on growing your business without having to worry about potential penalties or falling victim to fraudulent schemes.
6. Overcoming Challenges in Crypto Bookkeeping with a Blockchain Accounting Firm
Although cryptocurrency offers exciting opportunities for small startups to propel into successful businesses that generate profit, it also presents unique challenges for bookkeeping.
This is mostly because of the decentralized nature of cryptocurrencies which means that businesses have to handle a large volume of data from various sources such as exchanges and wallets.
As the value of digital currencies also tends to fluctuate frequently, crypto bookkeeping becomes quite challenging for the in-house accounting team. When accountants in your teams have to spend all resources focusing on crypto financial reporting, the day-to-day workflows get disrupted.
Therefore, as the adoption of cryptocurrency grows in your business, it is essential to hire the services of an experienced blockchain accounting firm which can maintain compliance and transparency in financial reporting.
For assistance in managing crypto tax accounts as well as traditional bank accounts, you can get in touch with OnChain Accounting’s crypto bookkeeping team who will maintain accurate records for you in both digital and traditional currency types.
For further readings
How Cryptocurrency Bookkeeping Services Can Protect Your Business
Digital Bookkeeping Tips from Crypto Tax Professionals for Businesses
Hiring a Blockchain Accounting Firm for Your Crypto Bookkeeping Needs
