Accounting and crypto taxes
Cryptocurrency has evolved beyond its early stage to become a ubiquitous asset category in today’s financial landscape. It’s worth noting that institutions are increasingly adopting cryptocurrencies and digital assets at an unprecedented rate of accounting.
Furthermore, trading, purchasing, and holding cryptocurrencies has become as straightforward as engaging in transactions involving traditional investments, such as stocks or bonds – perhaps even more so.
However, this ease of use may be a double-edged sword. In most contemporary economies, when a new asset class gains traction, regulations are expected to follow suit quickly accounting.
In the case of cryptocurrencies, though the IRS and other agencies swiftly emphasized the obligation for taxpayers and businesses to pay regular capital gains tax on their cryptocurrency profits, comprehensive regulations governing digital assets have not kept pace with this rapid evolution.
Nonetheless, this situation for crypto tax, crypto bookkeeping, and crypto accounting are currently transforming accounting.
Regarding cryptocurrencies like bitcoin, which are exchangeable accounting for legal currency or goods, the IRS employs the term “convertible virtual currency” for its definition. Disclosing it as income on your tax returns is mandatory when received as compensation for services provided.
Furthermore, any cryptocurrency held as a capital asset is categorized as property by the IRS. Consequently, it is customary that any gains derived from holding cryptocurrency are subject to taxation as capital gains. These gains are only reported when the cryptocurrency is sold. If it merely appreciates without being sold for a profit, it remains untaxed until that point.
Recording Gains and Losses from Cryptocurrency Accounting
Cryptocurrencies are treated as intangible assets for taxation purposes. When you realize a profit from selling cryptocurrency, the IRS mandates that you declare it a capital gain. It’s crucial to emphasize that you can only report gains on your taxes once you have sold the cryptocurrency, so it’s vital to maintain a record of its purchase price. When it is eventually sold for a profit, you would report the revenue just as you would for any other capital gains.
It’s also essential to keep track of the duration you hold your virtual currency. If it’s held for less than a year, it falls under short-term capital gain. If held for over a year, it qualifies as a long-term gain.
Conversely, if the value of your cryptocurrency holdings declines, you must record these as impairment charges. It’s worth noting that the value of cryptocurrency can fluctuate over time, rising or falling, and any significant drops should be reported as an impairment of the cryptocurrency’s cost accounting.
There is no immediate reporting requirement when you acquire cryptocurrency using real currency. It only becomes a financial stake in the cryptocurrency market when you eventually sell it for a capital gain. Nevertheless, it can still be categorized as a capital asset if you intend to utilize it as an investment.
As previously stated, receiving cryptocurrency as compensation for services provided or goods sold must still be disclosed as income on your tax return. Make sure to ask your crypto accountant or crypto tax accountant about any questions you may have around this topic.
Reporting Requirements For Brokers
Cryptocurrency brokers must proactively monitor their transactions and those participating in them. This is now of greater significance due to the recent infrastructure bill progressing through Congress.
The bill broadens the “broker” definition to encompass “any individual who, for compensation, is responsible for and consistently provides services facilitating the transfer of digital assets on behalf of others.” This expanded definition could encompass individuals involved in cryptocurrency mining and even those developing technology to enable the accumulation or exchange of virtual currency.
Consequently, if you are involved in virtual currency, collecting comprehensive transaction details diligently is advisable. Brokers are legally obligated to report information about transaction participants, and obtaining this information may require deliberate efforts before each transaction.
Essentially, if you deal in cryptocurrency, you’ll likely want to find ways to collect as much information as you can about those you trade with and keep it on file. A crypto CPA can help you organize and aggregate all that information needed as they specialize in on-chain data.
Cryptocurrency is a relatively recent innovation, and although some customary practices are emerging, they remain adaptable. Therefore, it’s crucial to remain adaptable and updated on recent advancements. Adopting a flexible accounting approach and regularly seeking advice from crypto tax professionals is likely your optimal course of action for the future.