Cryptocurrency accounting services have transformed the face of the financial spectrum and brought various new challenges and opportunities to investors, businesses, and accountants. In the midst of increasingly popular digital currencies, accounting services needs will become more specific. This guide is aimed at breaking open the mystery surrounding cryptocurrency accounting services, offering a very basic understanding of concepts, best practices, and regulatory considerations. Whether you are an investor seeking to monitor your portfolio or a business considering accepting cryptocurrency as payment, the following guide will arm you with all the essential information needed to meet the accounting challenges in the crypto world.
What is Cryptocurrency Accounting?
Cryptocurrency accounting encompasses the financial reporting that comes under our financial reporting services and it needs around cryptocurrencies for both investors and businesses.
Given this, we will be talking about the former in this write up. Everything you need to know on using cryptocurrency for accounting purposes for the accountant, CPA, and tax manager.
Cryptocurrency financial reporting is not aligned with existing accounting guidance under US GAAP or IFRS. States' CPAs and US Congress members have requested updated guidance from the FASB to address these concerns. The IRS and other tax offices have confirmed that cryptocurrency should be considered as a capital asset and subject to Capital Gains Tax.
However, some instances may result in crypto being subject to Income Tax but it completely depends on the transaction to transaction. The nature of crypto investments also presents specific challenges for crypto tax accounting services. The best advice on cryptocurrency accounting services is from the IRS and other tax offices.
Cryptocurrency Accounting Services and Blockchain Technology
In order to understand the concept of cryptocurrency accounting services, it's important to get the blockchain technology. Hence given below are some of the important aspects of both of them together:
Understanding of Blockchain Technology
In easy language, a blockchain is also a digital ledger - which is a chain of blocks of data, hence the name.Blockchain technology uses algorithms in cryptography that are safe procedures so as to lock each block of data and link the blocks together to provide a record of previous data.
Blockchain Technology Use
Digital information can be recorded as well as distributed in a safe manner with the help of this technology. In doing so, it facilitates data to be more transparent as well as decentralized.
When Bitcoin was created - the mission was clear. Satoshi Sakamoto, the creator, created Bitcoin so that anybody, everywhere, may send money via the internet without the need for a centralized third party, such as a bank.
Industries Using Blockchain Technology
Present ways different industries are using blockchain technology include:
- The pharmaceutical companies have started to use blockchain technology for transforming track-and-trace serialization processes by utilizing a transparent, immutable digital ledger of data.
- Accounting firms are using blockchain technology to better help do away with the need of having to input accounting information into multiple databases.
- Fashion retailers are using blockchain technology for enhancing their supply chain logistics whilst at the same time providing transparency to the consumer.
What are the Challenges of Crypto Tax Accounting Services?
Some of the key challenges with respect to Crypto tax accounting services are discussed below:
Lack of Crypto Knowledge
The crypto market is constantly evolving, with DeFi being a key example. DeFi involves investors using liquidity pools for trading, staking, lending, and mining. However, DeFi protocols differ, complicating tax considerations. The IRS and other authorities lack guidance, and accountants interpret crypto tax rules for DeFi transactions. This summary covers various types of cryptocurrency tokens, including utility, security, asset-backed, and non-fungible tokens, each with varying tax implications.
Unclear Tax Advice
The IRS has provided unclear guidance on most crypto transactions, including Capital Gains Tax and Income Tax for services, airdrops, forks, and mining crypto. However, many common activities like staking, play-to-earn income, and NFTs lack tax guidance. This has led to confusion for investors and increased pressure on accountants to interpret the convoluted rules.
The UK's HMRC has attempted to address this issue through updates, but it has become more confusing for investors. To address this issue, extensive guides on crypto tax guidance by countries worldwide are available, allowing users to customize their crypto tax treatment according to their country's rules.
Isolated Transaction Data
Crypto accounting faces a unique challenge due to the isolation of transaction data, as most investors use multiple crypto exchanges, centralized and decentralized wallets, and unique DeFi protocols. This makes it difficult to combine transaction data into a coherent financial report, as each exchange records transactions made on that platform.
Some platforms lack export options, making it difficult to track crypto assets for cost basis, fair market value, and capital gains or losses. However, with a single portal, users can monitor all transactions on each exchange and wallet, ensuring all necessary information is available in their account.
Following Market Value
Cryptocurrencies are volatile, with Bitcoin losing over $20,000 in value in just a few months. To determine fair market value, crypto accountants must use transaction data or price aggregators like CoinMarketCap, CoinGecko, and CryptoCompare. However, slight discrepancies among price index websites and individual exchanges can cause discrepancies. Due to the lack of help from the IRS and other tax offices, a consistent, fair methodology is necessary. Crypto accountants must apply this consistent approach to ensure accurate valuations.
Crypto Accounting Resources
We have compiled a list of crypto accounting resources to assist professionals in successfully navigating crypto tax for their clients. As the cryptocurrency market is always evolving, so shall its accounting. This is necessary for the proper recording and reporting of digital assets and proper management.
Conclusion
Best practices regarding cryptography accounting services shall thus help any individual or business reduce risk and help unlock all the potential that lies within this new financial technology. Hence we suggest the name of Fino Partners because they are experienced in providing such accounting and bookkeeping services for the businesses in the US market. Whether a total newbie in your crypto journey or looking to sharpen skills in accounting, the way forward into remaining abreast and flexible is what will help you stay on top of this ever-changing landscape. With proper knowledge and tools, you can really unleash your confidence while navigating the exciting world of cryptocurrency accounting services.
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