Cryptocurrency Accounting for Business: A Comprehensive Guide
It seems that times when crypto-assets were merely a geek thing are over. Cryptocurrencies are on the verge of becoming legit money in many countries other than El Salvador, renowned as the first-ever country to recognize crypto as legal tender.
As many users have already piled up enough different crypto coins, they are looking for ways to spend what they have. The only problem is: there aren’t many businesses that will accept crypto as a payment method. Yet.
On the other side of the market, there are business owners that recognize the potential of crypto and the importance it will have in the future. Their main concern isn’t whether or not they will find crypto-paying customers, because customers are many and willing to spend their digital coins.
The main concern every business owner willing to allow crypto payments is how to manage accounting crypto. The legal matters surrounding crypto are still vague, and we are all participating in the making of the new crypto business accounting framework.
In this article, we compiled the crucial information you need to know in order to successfully process crypto payments and perform crypto-asset accounting.
Let’s get right to it!
Introduction to Crypto Accounting Audit
As previously stated, there are international companies that are integrating cryptocurrencies in their financial processes. Among the most important trendsetters in this regard are Tesla and Microstrategy. Last year, both of these companies added $0.5 and $1.5 billion worth of Bitcoin to their balance sheets, respectively.
Such steps undertaken by big players inevitably inspire other businesses as well. According to recent reports, there are 2,300 businesses running in the U.S. and accepting crypto payments. If we include businesses that provide a cryptocurrency ATM, this number immediately rises to 5,968.
These numbers show that the U.S. is undoubtedly the world’s leader when it comes to crypto adoption. It is followed by Italy and Slovenia, with 1,366 and 1,133 businesses accepting crypto. Except for these two countries, the EU has another two members among the top-ten crypto-friendly businesses: Germany, Spain, and the Czech Republic.
When it comes to the UK, with around 430 businesses accepting crypto payments, it currently holds 13th place on the list of the countries with the highest number of businesses accepting crypto.
Different Levels of Accepting Crypto
There are multiple ways a company can include virtual currency in its financial operations.
To begin with, companies usually begin with simply accepting customer payments in exchange for products or services.
However, there are companies that take things a step further. They find more sophisticated ways to incorporate cryptocurrencies, such as paying their employees, contractors, or suppliers in crypto. Using cryptocurrencies in a wider selection of financial operations implies a somewhat more complicated accounting process.
Although it is not an impossible task, your accountant trying to work out your crypto finances if will probably encounter a few difficulties. He or she will need to deal with an asset whose value is highly volatile and still not legally defined.
Trying to count taxes and comply with anti-money laundering laws with such a fleeting asset might seem like building castles in the air. And partially, it currently is something like that.
However, national financial and legal bodies are beginning to recognize the legal vacuum. Many actors in the crypto industry are hoping that things are on the way to change for the better.
Businesses Require a More Precise Legal Guidance
Luckily, businesses and accounting firms aren’t waiting for the legislation to appear out of thin air.
The situation in the U.S., for example, shows that there is a strong initiative to change and create more specific crypto rules.
Numerous CPAs and accounting firms, as well as members of Congress and the Chamber of Digital Commerce are putting pressure on national financial institutions members of Congress and the Chamber of Digital Commerce to address the crypto industry with more attention.
Additionally, the issue has been attracting a lot of media and social media attention recently.
Financial Accounting Standards Board (FASB) is the door most of these initiatives are knocking on.
Luckily, on the other side, there are signs of willingness to start changing the current status quo. In summer 2021, the FASB invited interested stakeholders to submit opinions and ideas regarding the announced technical agenda.
What Can Crypto Do for Your Company?
When it comes to incorporating cryptocurrencies into your balance sheet, the main question is: do the benefits outweigh the trouble?
There is no definite answer to this question. Each business needs to make that decision individually, based on its particular set of goals, assets, values, etc.
However, there is a list of the most common benefits businesses get to enjoy when they start accepting crypto. And, as the matter of fact, it is not short.
To begin with, using crypto will allow your business to reach new target audiences. According to some estimations, the new customers make up around 40% of the customer base for businesses that introduce crypto payments. And, these newcomers tend to spend almost twice as much. Above all, these businesses attract a clientele that is into the latest technology and favours online transparency and privacy.
Furthermore, accepting crypto is a great competitive advantage. It sends out a message that your company is innovative and ready to face the future of technology and finance.
Also, another important reason for businesses to start accepting crypto is the ability to access new liquidity pools and sources of capital, that would otherwise be unavailable.
Besides, although introducing crypto is a complicated process, crypto has some superpowers fiat currencies don’t. With digital currencies, users get to have real-time insight into their revenues.
B2B Business Opportunites
And if you are running a B2B business, you can expect some important benefits as well. As more and more companies are realizing the benefits of crypto, they too will start looking for stakeholders that adopt disruptive technologies. There are multiple reasons why companies that might be your clients could be interested in crypto:
- Simple, fast, and secure money transfers
- Better control over capital and transactions
- Opportunities for more effective risk management of digital investments
- Strengthening the company’s resistance to inflation and political instability
How to Manage Accounting Crypto?
So, let’s say your company is thinking of opening the doors for crypto assets. The next question is: how to document cryptocurrency transactions for accounting?
Treating digital assets in your account books is possible, just like with any other type of asset. However, in certain aspects, crypto is special. Let’s go a bit deeper into it.
To begin with, businesses usually record trading in crypto just like they record stock trading. When you spend fiat currency to buy crypto, you will credit your cash account and debit the crypto account.
Also, if impairments occur, you will account for this by debiting the loss account and crediting the asset account.
In case you wish to eliminate your investment in crypto, you will credit the asset account at its book value, and debit the account that represents the consideration received in exchange for trading your digital asset away.
If crypto is traded for fiat, the cash account will be debited. On the other hand, if one digital asset is traded for another digital asset, the crypto account is the one being debited.
Adding Crypto to the Account Books: Two Approaches
There is one thing that should be made clear from the very beginning. There are many business owners who accept crypto payments, which is one thing. Holding crypto on a balance sheet, on the other hand, is a completely different thing.
The difference between these options is important, and choosing between the two should be a careful decision. Such a decision should be made in consistency with your business objectives, resources, drawbacks, risks, etc.
Now, let’s carefully elaborate on the two paths your business can take when it comes to accepting crypto.
1) “Hands-Off” Approach: Enabling Payments
Enabling payments is something like a light version of using crypto. A hands-off approach means that you will simply allow your customers to buy your products or services using digital currencies, i.e. bitcoin. Your payment processor will merely convert the crypto from your customer’s account to fiat currency. That means your account actually won’t get in touch with crypto, and will only receive fiat.
In a way, this is a win-win combination if you would like to attract customers willing to spend crypto while saving yourself the trouble of complicated crypto accounting. Also, adopting a hands-off approach won’t require many adjustments in terms of corporate functions and risk management. It is the easiest and fastest way to get involved if your company is new to crypto.
This kind of approach is particularly convenient for companies that rely on agents and third-party vendors.
Third-party vendors help a company make the sales and they manage a great deal of risk. However, remember that third-party vendors can’t really manage all risks. Even though they resolve many technical questions and ensure compliance, it is not always their job to make sure your business is compliant with anti-money laundering laws and KYC requirements.
In case you employ third-party vendors, their activities should be controlled so that they comply with any regulation imposed by the governmental economic and trade institutions.
Therefore, if your company is working with third-party vendors, make sure to think through the following: how does accepting crypto payments affect their position? Do they have efficient internal controls, such as cybersecurity, that are particularly important for processing crypto payments? Preferably, vendors should be able to provide some assurance about the ability to follow the introduction of crypto. For example, they should be able to provide a SOC1 or SOC2 report.
Also, another issue to keep in mind when it comes to third-party vendors is the connection between the innate volatility of crypto assets and your vendors’ conversion pricing.
Additionally, if you’re running an international business, keep in mind that international licensing and regulation of crypto transactions are constantly changing. In such a context, you should be clear on how will your agents guarantee appropriate licensing and compliances across the national jurisdictions.
2) “Hands-On” Approach
Once a company is ready to incorporate crypto more deeply into its financial system, it will adopt a hands-on approach. While major changes in operations and treasury functions might be required, the company will be able to enjoy many additional benefits.
In the case of a hands-on approach, the corporate treasury is the major player that carries out the task of incorporating crypto into the company’s financial operation. It is the treasury that maintains the company’s financial relationships with investment partners, capital providers, and banking groups. Additionally, the treasury is the one determining which types of financial services a company needs, considering the broader DeFi context.
Usually, before embarking on this journey, the treasury has to prepare the company for integrating this entirely new financial dimension.
First of all, the company needs to define the goals as precisely as possible. What should be achieved by adopting an entirely new asset class?
Furthermore, the treasury should be clear on what is necessary to efficiently and effectively process, monitor, and manage payments in digital money. That means, your company should make sure that the staff fully understands the way crypto works, with all of its benefits and risks.
If not, your company should consider outsourcing the custody of the crypto to a third party.
Finally, as the likelihood of national central banks issuing digital currencies is growing, your treasury should be prepared for such an opportunity.
Deep Crypto Integration: Key Aspects
Here are several major aspects of deep crypto integration your company should pay close attention to.
- Crypto Wallets
There is no way to process crypto without crypto wallets. They are necessary in order to hold and manage crypto.
Every company needs to choose a wallet structure that suits its needs and business model.
In general, there are two major types of crypto wallets: “cold” and “hot” wallets.
Cold wallets refer to accounts that store value, while hot wallets perform as operational accounts. Also, cold wallets are better for long term storage. On the other hand, hot wallets are used for current operations. They are able to record essential data, and facilitate forecasting, rapid payments, and more transparent transfers and investments. Thus, hot wallets are of indispensable value to the treasury department.
Being able to track the details of transactions is essential for businesses and global companies with high volumes of transactions. By tracking, businesses usually take the following into account:
- Date and time of crypto acquisition
- Assigning of basis
In order to tackle the issue of volatility, companies often convert crypto assets to stablecoins. Once a cryptocurrency (i.e. bitcoin) is converted into USDC (USD Coin), it becomes much easier to process this digital asset. Except as a life hack for fighting the volatility issue, conversion to stablecoins is especially valuable because it makes the transactions much easier for traditional banks and the treasury.
- Anti-Money Laundering Laws and Know Your Customer
The AML and KYC regulations provide a legal framework for any crypto operating business. Therefore, they have important implications for every stakeholder within a crypto ecosystem.
The main purpose of AML and KYC regulations is to make sure companies aren’t being used by criminal foreign vendors, in order to cover up the evidence of money made through illicit activities. Especially for companies working in the international milieu, this is an important issue that needs to be assessed very carefully, in order to avoid serious legal complications.
- Second-Layer Protocols
In order to record a particular transaction on a blockchain, a series of aggregate transactions need to be performed as well. These additional transactions need time to be aggregated, and during this period, the process is vulnerable and prone to malicious manipulation.
In the corporate context, the second-layer protocol is a scaling app that sits on top of blockchain systems. They are used to speed up the recording process and reduce fees.
Second-layer protocols are promising innovations, whose benefits are currently recognized by only a handful of companies. Most likely, second-layer protocols will become much more effective in the future. Some even believe they will outrun the traditional payment systems we currently use.
Two Versions of the “Hands-On” Approach
There are two ways your company can perform a deep integration of crypto. You can either:
- Employ a third party to maintain the blockchain and provide wallet management services, or
- Do it in-house, relying on your internal team and resources.
The latter approach might be a more difficult one, and at the moment, most companies opt for third-parties to perform this task. In case you want your team to perform the adoption of crypto, you will need to consult your legal advisories to make sure your company has all the licenses required. On the other hand, with the in-house performed hands-on approach, the company will have greater control over the transactions.
Best Accounting Software for Crypto
We are living in an era of automation. Just like budgeting can be handed over to YNAB app or trading with crypto to CEX and DEX arbitrage bots, crypto accounting can partially be automated as well.
Accounting software for cryptocurrency is able to speed up and simplify the way your taxes are calculated and filed. Firstly, the software will keep track of crypto gains and losses. Then, it will automatically fill in the taxation documents required.
Although not omnipotent, apps can be of great help. The primary benefit of investing in such software is saving time and energy for your team, that will now be able to dedicate to something else. At the same time, the app will perform the required tasks for you, for free.
The basic function of crypto accounting software for businesses is to allow you to integrate various exchanges and wallets, and obtaining important transaction details, such as dates, amounts, values, names, statistics, etc. On the other hand, these apps will require some information, such as:
- Gross income for the last year
- 1099-INT forms showing interest paid
- 1099-G forms showing refunds, offsets of state, credits, and local taxes
- Receipts and other income documentation
The usual features of the best accounting software for cryptocurrency include, but are not limited to:
- IRS wizard
- Audit assistance from a crypto accountant
- Support for various exchanges
- Integration with the exchanges and collecting data
- Calculation of crypto profits and losses
- Import and export of transaction reports
- Long-term data storage
- Filing the state returns along with the taxes
The following apps have proven to be among the best accounting software for cryptocurrency business so far:
Easiest Way to Do Accounting for Crypto
There still aren’t general accounting standards for cryptocurrencies. This is partially so because various legal systems still can’t agree on what cryptocurrencies even are, let alone how to pay taxes for them.
Still, cryptocurrencies have real value so most basic accounting principles can be applied. Digital assets received as payment from a customer are subject to regular revenue recognition rules. Still, they aren’t treated as cash, but rather as assets with a certain value.
The recorded value of the asset is determined at the moment the transaction was processed or the contract was concluded.
Although the value of crypto often changes, it is impossible to change the balance sheet by and by. In order to properly account for changes in value, crypto might require special treatment and additional accounting as an embedded derivative.
Accounting for crypto expenditures
If a company decides to use crypto for expenses, each transaction will have two important dimensions:
- The sale of the crypto asset
- The receipt of a good or service for a noncash consideration.
The receipt is accounted for as a non-monetary consideration, meaning that the company will need to treat the other party in the transaction as either a customer or a noncustomer. In turn, this will affect the way items are defined in the financial statement.
Keep in mind that the value of the crypto asset and the transaction prices are determined at the same moment. That moment is usually when the contract became legally enforceable.
Furthermore, if the value of a digital asset used in a transaction is different from its initial value, the realization of the value differential may come up.
Implications of using intangible assets for monetary purposes
To begin with, the specific way in which crypto assets are usually treated by the law will probably require closer collaboration among the departments. This is especially true for the treasury, accounting, and tax departments. Any realization of gain or loss caused by the use of crypto needs to be reported to the tax department.
Furthermore, the company will need to find a proper way to adapt its financial statements. Introducing crypto will require additional disclosures, which will keep a detailed record of all the crypto transactions.
In case of companies adopting the hands-on approach, these adaptations are usually more complex. It is not enough only to adjust financial statements, but to make sure they are adequate and detailed enough. If not, the company is at risk of legal complications and, potentially, a lawsuit.
Also, using crypto will irrevocably change the company’s financial system. Cash flows, balance sheets, and operations will have to be modified so as to accommodate crypto transactions.
Finally, accepting crypto payments requires diligent and careful risk management. The impacts on the company’s financial presence and future need to be assessed and properly mitigated.
The Implementation Plan
Before doing any accounting and implementing crypto payments, you need a thorough implementation plan. This plan should contain the overall strategy of crypto implementation and define the short-term and long-term goals. Furthermore, the plan needs to be clear on who is going to carry out the crypto innovation. Which departments will be affected and does the company have the suitable human resources to perform the implementation?
Cybersecurity is one of the most important issues to consider. Any cyber-attacks or data safety breaches can be fatal for the company’s cash flow and reputation.
Furthermore, is the company able to afford the introduction of crypto? Crypto is an exciting, but costly innovation. You will probably need to hire new employees, train the existing ones, buy new equipment, pay for the software, do regular audits, etc.
Also, a company needs an exhaustive implementation roadmap. Every step of the way needs to be elaborated in as much detail as possible.
Finally, the company needs to be clear on KPIs and the ways the progress and the result of the innovation will be evaluated.
Since it can be a complicated and lengthy process, most companies opt for a pilot. For example, a certain amount of crypto can be purchased. Then, the treasury can redirect it into a couple of payments, just to see how the crypto is processed, received, and revalued.
How to Do Crypto Trading Accounting for Taxes?
There is no universal explanation on how to do accounting for taxes when it comes to crypto payments. This is because the way taxes are managed largely depends on national legislation and how a particular legal system defines crypto. Therefore, your treasury will have to customize the accounting according to your local legislation.
For example, the current legality status of bitcoin in the EU and UK is that it is a digital, intangible asset that is risky, but not illegal to own, trade, or mine. However, the way each of the European countries treats Bitcoin is different. While Germany sees bitcoin as a personal asset, in the UK it is a capital asset, while Slovenia defines cryptocurrencies as neither assets nor currencies.
The fact that crypto is recognized as an intangible asset, means that using it as a means of exchange might call for warrant adjustments. Also, additional disclosures to Cash Flow and Profit and Loss statements might be necessary as well.
At the moment, most governments accept tax payments only in fiat currencies and official legal tenders.
Do My Financial Statements and Tax Reports Have to Align?
No, the rules for your financial statements and your tax reports won’t be the same every time.
Let’s say you have unrealized losses in crypto trading. In that case, and especially when there’s an impairment event, you will have to make entries in the account books according to the IFRS and GAAP rules. These don’t necessarily imply a tax deduction for unrealized losses.
You can easily determine the cryptocurrency tax by separating all of your transactions into three main groups:
- Those that generate income taxes
- Those that generate capital gains taxes
- Non-taxable activities
Actually, determining the tax basis is much less of a problem for most companies processing crypto than GAAP reporting.
GAAP and IFRS Perspective: Taxable Transactions
Here is a list of activities that are usually considered taxable:
- Any income generated through mining
- Earnings generated through interest
- Hard forks.
If your company earned any value from these activities, then these gains should be mentioned in your yearly gross revenue. As such, they are treated as usual business income.
Naturally, if these activities imply any costs and expenses, these get to be deducted.
On the other hand, any activity other than selling, exchanging, or paying a vendor generates capital gains tax
According to a general definition, any activity that doesn’t fall under income tax or capital tax, is non-taxable. Although local regulation might vary, in general, these activities are usually non-taxable:
- Buying crypto with fiat
- Donating crypto or giving it as a gift
- Transferring crypto between exchange platforms
The Crypto Price Volatility and Value Determination
When calculating your taxes, trading in virtual currency is seen as a nonmonetary exchange or barter transaction. Therefore, the value is calculated at the time of receipt and must be documented as such.
Additionally, payments in cryptocurrencies call for gain or loss recognition. Therefore, keeping a record of the cryptocurrency transaction details is of vital importance for calculating the tax base. Having documents that prove how cryptocurrency value is calculated is a must.
Using Crypto For an Expenditure
When a company uses crypto for purposes of expenditure, this will trigger the following:
- The gain or loss on the crypto
- The expense or payment itself.
Again, it is extremely important to have documents and proof that support the estimated crypto value.
If you want to pay vendors using crypto, this transaction needs to be recorded the same way as if the crypto was being sold: it will count as disposal. In turn, the difference between the expense and the calculated value of the crypto asset represents the capital gain.
Example 1. Let’s say you hold 200 BTC in your wallet. When you bought these coins, their price was $350,000. In the meantime, the value went up to $450,00. At the same time, your company needs to pay a third part company for performing an audit. They require $450,000, and you wish to pay them in crypto.
How will your ledger see this situation?
Firstly, you will put a $450,000 debit to your expense account, as a cost of professional services. Then, you will credit your Bitcoin asset account for $350,000. Finally, the remaining $100,000 will be credited to the capital gain account.
Example 2. Again, you hold 200 BTC in your wallet and their original price is the same ($350,000). However, what if, this time, their price went down to $250,000 and then came back up to $450,000? In that case, you would record the impairment once the drop in value happened, so you wouldn’t be able to account this as a capital loss. On the contrary, you would record a capital gain of $200,000, as a difference between the original book value and its current fair value.
Crypto and Payroll
If your company wishes to pay salaries in crypto, you need to keep in mind that most legal authorities don’t accept crypto. That means that you will have to pay withholding taxes in fiat currency, which might imply additional transactions and fees.
Furthermore, crypto doesn’t come with usual bank statements, so you will have to make additional effort to capture and disclose all relevant documentation. In other words, you will need to take responsibility for supplying the required information to the authorities.
How to Do Accounting for Cryptocurrency Mining?
Without mining, there is no blockchain and no circulation of crypto assets. If you’re running a company that is partially or fully engaged in mining activities, you’re probably wondering how to set up accounting books for cryptocurrency mining.
For sure, any mining activities need to be recorded in your ledger. You will record them as income-generating activities, by crediting your mining income account while debiting the account with the generated crypto assets at a properly estimated market value.
Although that problem might be solved in near future, the fact that mining consumes a lot of energy is bad news for the environment. However, it is good news for your taxes. Since mining implies significant costs, so you will be able to deduct those from your income and in turn, get a lower tax base.
And since you will probably use fiat currencies to pay for the mining (i.e. electricity), make sure to credit the cash account. Then, you will either debit an asset account or treat the cost as an expense.
Common Crypto Accounting Issues
If you decide to start using crypto in your cash flow, prepare for questions without certain answers and legal dilemmas from time to time. Here is a list of issues companies usually have when trying to operate and account crypto.
From the perspective of accountancy, crypto doesn’t have much to do with money. Rather, it is an intangible asset. And, to complicate things even more, intangible assets with frequent and, oftentimes, unpredictable shifts in value. This is the main obstacle to treating crypto assets as cash equivalents in your ledger.
The companies usually use an alternative approach and treat them as aforementioned intangible assets, inventory or financial instruments. Understandably, none of these categories fully match the true nature of crypto assets, and it is where the problems occur.
The most common approach, that of intangible asset, is problematic mostly because it treats crypto assets as indefinite-lived, while the value often dips below the cost basis.
- Unrealized losses are recorded, but gains aren’t
In the U.S., unrealized losses get recorded but not gains. The current regulation doesn’t leave any space for changes that would record the subsequent impairment losses. And this can be tricky if the asset later grows back and surpasses the initial values.
This is what it looks like in real life. Your company purchases $600,000 worth of Bitcoin, whose value then drops to $500,000. The ledger will require you to account for a $100,000 loss, and reduce your Bitcoin holdings. In the meantime, the value of Bitcoin goes up to $700,000. However, the law doesn’t allow you to change the balance sheet and change the loss amount and has to stay at $500,000.
Then, a representative of a tax authority checks your financial statements and notices the incongruencies. It can easily lead to a misunderstanding and a wrong conclusion that you might be hiding something.
To Wrap Up: It’s Complex, But Doable
A decision to welcome crypto in your company’s financial system is a big one. There are a lot of considerations to take, many changes to make, and a lot of uncertainties to face.
Still, there are many companies that manage this, and their success is the best proof that it is possible. From international giants like Microsoft and Tesla, to Subway and Pizzaforcoins, these businesses are showing us that obstacles aren’t insurmountable. Although implementation of crypto transactions will require some time, effort, and investment, billions of dollars of these companies’ revenue show that crypto is the future of finance.
Disclaimer: All information contained here should not, under any circumstances, be construed as financial advice, investment recommendation or an offer of, or solicitation for, any transactions in cryptocurrencies.