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How does cryptocurrency affect accounting?
Even your grandparents have probably heard of bitcoin by this point. Indeed, cryptocurrencies are not only becoming more widely known and accepted. In fact, Tesla traded around $1.5 billion of Bitcoin in Q1 2021 alone. As such, businesses need to know how to properly do their books when it comes to crypto and accounting.
What is a cryptocurrency?
Simply put, a cryptocurrency is any currency that exists digitally and uses cryptography to ensure that it can’t possibly be counterfeited. There is no central regulating authority behind a cryptocurrency as it uses a decentralised system to issue new units and record all transactions. As a result, it effectively puts the power in the hands of the users, rather than the banks.
Challenges faces in the accounting treatment of cryptocurrencies
Accounting for cryptocurrency isn’t quite as simple as accounting for conventional currency as it doesn’t use the same standard. They are not legal tender in most countries, after all, and there are no regulatory standards. Not only that, but cryptocurrencies are constantly shifting in value by their very nature.
Even when it comes to recording cryptocurrency as an intangible asset, their cost often dips below the cost basis. In the US, it’s also only losses that get recorded so if you buy $100,000 of Bitcoin and its value drops to $80,000 then you have to recognise a $20,000 loss and reduce your holdings accordingly.
How to record business record crypto and digital assets
The best way to record cryptocurrencies on your invoices and balance sheets is to record them at the market value they hold at the time of purchase. So, if you purchase the cryptocurrency using, for example, GDP, then you should credit your cash account for the same amount in that currency. Then do the opposite when you sell on the cryptocurrency.
How to record vendor payments
When it comes to using cryptocurrency to pay vendors, it technically counts as a disposal. So, you need to record a gain for the difference between the expense and the value of the currency. For example, if you own 200 Bitcoin and you acquired them for $500,000, the fair value price might have risen to $700,000.
So, you must pay your auditing firm $700,000 using the intangible asset and record a debit of the same amount to your business account and credit your Bitcoin asset account for $500,000, crediting the remaining amount of $200,000 to a capital gain account.
It’s complicated, of course, but given the continued popularity of cryptocurrencies across the world these are hoops you’re probably going to have to jump through sooner rather than later.