In the ever-evolving landscape of coin and cryptocurrencies, accounting practices are facing unprecedented challenges. As the crypto space continues to innovate at a rapid pace, conventional accounting standards are being established. This guide aims to illuminate the complexities of crypto asset accounting while emphasizing the importance of a principles-based approach. Exploring the nuanced differences in accounting for coin and crypto assets under International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP), we delve into key considerations such as initial recognition, subsequent measurement, fair value assessment, tax implications, and disclosure requirements.
The Evolving Coin and Crypto Asset Accounting Landscape:
The dynamic nature of coin and cryptocurrencies presents a unique challenge to traditional accounting standards, prompting a careful examination of existing principles to ensure accurate and transparent financial reporting.
Key Standard Setters: IASB and FASB:
At the forefront of shaping accounting standards are the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB). Formulating International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP) respectively, these entities play a pivotal role in determining how businesses account for coin and crypto assets. It's crucial to recognize that while both aim to enhance financial transparency, the application of accounting principles may vary slightly under IFRS and US GAAP, depending on the jurisdiction of the entity.
Accounting Considerations for Coin and Crypto Assets:
This guide delves into critical aspects of coin and crypto asset accounting, including:
Initial Recognition and Subsequent Measurement:
Distinguishing the treatment of coin and crypto assets under IFRS and US GAAP, where IFRS allows for accounting under Intangibles or Inventory, while US GAAP restricts crypto assets to Intangibles. IFRS-IAS 2 ‘Inventory’, IFRS - IAS 38 ‘Intangible Assets’, US GAAP - ASC 350 ‘Intangibles, Goodwill and other’
Fair Value Measurement:
Exploring the definition of fair value under both IFRS 13 and US GAAP ASC 820, the fair value is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. With different exchanges quoting different prices, it is important to maintain a consistent approach with regards to pricing the source of your coin and crypto assets where the greatest volume is being traded. Additionally, because markets never close, it is advisable to use the same time for pricing assets.
Tax Considerations: Calculating Capital Gains/Losses:
Calculating capital gains or losses by various methods, such as FIFO, WAC, LIFO, and HIFO, to determine cost basis as standard. Finance managers monitor digital asset unrealized gains/losses for informed investments and risk management. Calculating capital gains or losses is crucial for tax considerations, allowing the offset of tax liabilities with capital losses. Realized gains, determined by subtracting the acquisition cost from the fair market value at sale, are typically relevant for tax reporting. Use Form 1099-B to the IRS when a customer has earned $600 or more of coin and cryptocurrency income. It is likely that all exchanges will be required to send Form 1099-DA starting in 2026. Form 8949 is the tax form that is used to report the sales and disposals of capital assets, including coin and cryptocurrency.
Not every coin and cryptocurrency transaction are subject to tax! You do not trigger a taxable event when you:
Hold coin and cryptocurrency
Buy coin and cryptocurrency with fiat currency and hold it
Transfer coin and crypto from one wallet you own to another wallet you own
Use coin and cryptocurrency as collateral for a loan
IRC Section 6050I requires that any person engaged in a trade or business that receives cash in excess of $10,000 in a single transaction or in related transactions must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business
The IRS can track Coin and Crypto transactions using Chain analysis contractors who analyze the blockchain and crack down on tax fraud.
Accounting Methods:
In the app market you can use the Gilded app. This app will Sync Bitcoin, Ethereum, and coin and cryptocurrency transactions (Income, Expenses, Fees) to QuickBooks Online and is SOC II compliant (SOC 2 Type 2 Compliance: Essential Guide for Organization). Coin and Crypto Tax Ledger is also available to track coin and crypto, Defi, NFT transactions, integrating with several tax reporting software manufacturers. These transactions will be in the form of Journal Entries which, in my opinion provide very little useful data to the Coin and Crypto holders.
Before Proceeding Please read: The Importance of Establishing and Following Consistent Accounting Procedures: Fraud Prevention
Otherwise, or in addition, like typical banking, you can
(1) Set up a Coin or Crypto-bank account as a bank asset to track coin or crypto-value.
Bank accounts (exchanges) like checking, and wallet income (cash/coin on hand) like savings or petty cash, on the balance sheet. Use location distinction on transactions to specify the specific exchange/wallet and class to distinguish coin or crypto type. **currently QuickBooks Online only supports Bitcoin xPub via Blockpath app
(2) Intangible inventory product and service items are setup as current assets, to track coin and crypto quantities, mapped to a Chart of Accounts Income Coin or Crypto Asset and COGS Coin or Crypto.
(3) Create estimates, purchase orders, bills (cash, or A/P purchase, yielding/staking-Defi liability) with corresponding bill payment, along with invoices (cash or A/R inventory asset staking/yielding-Defi lending) with corresponding invoice payments to track income, deposits, expenses, withdrawals to fiat (cash on hand wallet), transfers and exchange trades. QuickBooks Online will track the coin and crypto-inventory COGS and value on a FIFO valuation basis on your Income Statement when coin inventory quantities move, by bill or invoice (buy/sell).
(4) Reconcile the asset coin or crypto-bank account on the "measurement date & time" using the market capitalization rate (or lesser-known FD Market Rate) to determine fair value reconciliation beginning and ending balance. After entering any fee expenses, changes in value will be recognized as: (Bank Value Gain/Loss RECON ADJ to Income Statement Coin & Crypto Gain/Loss) Note: You can use Excel Spreadsheets (Spreadsheet Sync) to track market capitalization rates beginning and ending balances on "measurement dates" and later use this information to chart changes in the market capitalization rates of your coin & crypto, providing you with valuable data analysis. This method of accounting is transparent, provides valuable reporting insight and follows the basics of financial accounting principles.
*If the coin or crypto platform has Excel data for your coin or crypto, with your balances, transactions, fees and ongoing capital gains earnings (ie..interest earned), the information can be imported to the QuickBooks Online Coin or Crypto bank account.
Item Setup:
Intangible Inventory Asset set up in Products and Services, for each Crypto-Coin would follow these rules:
Intangible Inventory (Inventory Asset=Intangible Coin or Crypto Name, Income=Sale of Coin or Crypto Income, Expenses=Cost of Goods Sold: Coin or Crypto) Cost basis is required for Income Statement COGS Calculations. Use Excel Spreadsheet Sync to update most current price and cost (fair value) be sure you do not overwrite the quantities on hand. (For Crypto: use measurement date and time) Update frequently, or as required for reconciliation and Income Statement reporting. COGS will calculate from the Products and Services list "first in purchase cost" if a new bill with the latest cost (paid or unpaid) is not entered in the system and attached to an invoice.
Sell Transactions:
Customer/Client: Use platforms such as Coinbase, Cashapp, Biance, FTX
Enter an Invoice to include a line ITEM for Intangible Inventory coin or crypto Name (Income=Sale of Coin or Crypto Income) and Category line item for additional fees (can be setup in Products and Services (COS). Use for Crypto inventory asset credit (reduce inventory, increase COGS) disposition, (staking/yielding-Defi lending) Class will represent the Coin or Crypto Name. Reports can be filtered to show Class, Customer and Location.
NEXT > Receive payment and deposit to the Coin or Crypto Wallet (Cash/Coin on Hand), Crypto Bank Account, Cash, Other Balance Sheet Account or Fiat Currency.
Two ways to Request Exchange Payment for Billable Expenses (Coin or Crypto):
(1) Invoice directly from an estimate, with already marked up items you are requesting payment or exchange for. If this is the case, when the billable Coin or Crypto is a buy transaction, the field for the client is entered on the bill or expense as they appear in the bank feed, but they are NOT marked up, only marked billable. These will then appear on the Unbilled Charges to be invoiced. When earned revenue is realized directly from the estimate/invoice, the markup is already calculated and the difference on the Income Statement is the estimated Sale of Coin or Crypto Income and associated Cost of Goods Sold: Coin or Crypto = Gross Profit/Net Income.
(2) If you are entering invoices directly from a bill or expense, marked billable and marked up to a client, the invoice will reflect on the Income Statement as Sale of Coin or Crypto Income and associated Cost of Goods Sold: Coin or Crypto, with markup as a separate income line item. This process creates a GAAP compliant transaction. You can also invoice with other bills and expenses as needed. If time is billable, make timesheets billable so you can add them to invoices. Turn this feature, and the Markup feature on in Accounts and Settings. Consult local jurisdictions for sales or other tax requirements.
NEXT > Receive payment to the Coin or Crypto Wallet (Cash/Coin on Hand), Crypto Bank Account, Cash, Other Balance Sheet Account or Fiat Currency.
Buy Transactions:
Coin or Crypto Bills and Expenses:
Payee/Vendor: Intangible Inventory 'Coin or Crypto Name'
Buy Price: Establishes Fair Market Value on buy date of the Coin or Crypto Inventory Item
Enter fees as an expense category line item mapped to the Income Statement (or set up a product and service item) Enter Coin or Crypto Inventory as the item: Intangible Inventory Coin or Crypto Name
NEXT > Pay Crypto Bills and Expenses with the Crypto Wallet (Cash/Coin On Hand), Crypto Bank Account, Cash, Other Account or Fiat Currency.
QuickBooks Online provides a multi-currency in accounts and settings under multicurrency. Currently QuickBooks Online only supports Bitcoin xPub via Blockpath app
Obtaining Clean Data for Cost Basis Calculations:
Highlighting the importance of reviewing transaction fees, gas fees and timestamping of transactions when maintaining a ledger of digital asset transactions.
Fees Imposed by centralized wallets are:
Default Time Zones for popular block explorers and centralized exchanges:
The process and data format may vary. Always refer to the platform's documentation for accurate information.
Disclosure for Coin and Crypto Assets:
Conclusion:
Given that existing standards require a principles-based approach, it is crucial to stay informed about evolving regulations and emerging best practices for accurate and transparent financial reporting. Whether you're a bookkeeper, accountant, investor, or financial professional, navigating the dynamic terrain of coin and crypto assets accounting requires a proactive and informed approach, ensuring alignment with jurisdiction-specific guidelines. As the coin and crypto industry continues to evolve, staying abreast of regulatory changes remains paramount for individuals and organizations to uphold the highest standards of financial reporting.
See also: Investopedia Simulator Crypto
See also: Forbes Digital Assets
See Also: Warren Buffett Revealed To Be Quietly Making Bank From Bitcoin And Crypto Amid Price Swings
See also: JP Morgan Chase Opinion
Market capitalization is a measure of the total value of a coin and cryptocurrency in circulation and is calculated by multiplying the current market price per unit of the coin and cryptocurrency by the total circulating supply.
The formula for calculating market capitalization is:
Market Capitalization=Current Price × Circulating Supply
Here's a breakdown of the components:
Current Price: This is the current market price of one unit of the coin or cryptocurrency, usually quoted in a specific fiat currency like US dollars (USD) or Bitcoin (BTC).
Circulating Supply: This represents the total number of units of the coin and cryptocurrency that are currently available and circulating in the market. It excludes tokens that are locked, reserved, or not yet mined.
What is a good market cap in coin and crypto?
Large-Cap: Coin and Cryptocurrencies with a market cap above $10 billion. For example, Bitcoin (BTC), Ethereum (ETH), Tether (USDT), and USDC. They are considered more stable. Mid-Cap: Coin and Cryptocurrencies with a market cap between $1 billion and $10 billion
See also: IRS: Crypto Currency Income Tax Question
*If you have any questions or concerns about this method of coin and crypto accounting don't hesitate to Contact Bookkeeping Business Online
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