Accounting for CryptoCurrency – A Detailed Guide

Cryptocurrency is a form of currency that can be used for investment purposes, as well as to buy and sell stuff, however, the big question is why doesn’t it behave like the money? 

And if it doesn’t what does it have to do with cryptocurrency accounting?

This is a detailed guide on cryptocurrency accounting. 

Let’s get started.

What is CryptoCurrency?

Cryptocurrency is a type of digital or virtual currency that uses cryptography for security and operates independently of a central bank. It is decentralised, meaning it is not controlled by any government or financial institution, and transactions are recorded on a public digital ledger called a blockchain.

The most well-known cryptocurrency is Bitcoin, where it all started, but there are many others, such as 

• Ethereum
• Ripple
• Litecoin
• Dogecoin 
• Etc

People often invest in cryptocurrencies as speculative investments, hoping to profit from their fluctuating values. However, they are also associated with risks, such as volatility and the potential for fraud and scams.

Cryptocurrency accounting and its importance 

A massive explosion in the cryptocurrency market has been challenging for accountants in many ways as they had to deal with an entirely different kind of asset that was neither similar to currency nor commodity. 

However, the industry had to adapt and cryptocurrency accounting evolved as a  process of recording and managing financial transactions involving cryptocurrencies. It includes 

• Tracking the purchase
• Sale
• Exchange
• Investment
• Transfer of digital assets
• As well as calculating the gains or losses associated with those transactions.

Cryptocurrency accounting is important for several reasons

Firstly, it ensures compliance with tax and regulatory requirements. Depending on the jurisdiction, cryptocurrencies may be subject to capital gains tax, income tax, or other types of taxation. 

Proper accounting allows individuals and businesses to accurately report their cryptocurrency transactions to the relevant authorities and avoid penalties for non-compliance.

Also, cryptocurrency accounting helps individuals and businesses understand their financial position and make informed decisions about their investments. By tracking the value of their cryptocurrency holdings and analysing their gains and losses, they can assess the performance of their portfolio and make adjustments as necessary.

It is also very important for security and risk management. By monitoring their cryptocurrency transactions and holdings, individuals and businesses can identify any unusual activity or potential security breaches and take steps to protect their assets.

To sum it up, cryptocurrency accounting is important to:

• Manage digital assets
• Ensure compliance 
• Transparency 
• Security and risk management
• Taxation

Difference between Cryptocurrency accounting and bookkeeping 

Cryptocurrency accounting and bookkeeping both involve tracking financial transactions related to cryptocurrencies, but they differ in their scope and purpose.

Cryptocurrency Bookkeeping

Let’s talk about Bookkeeping first. It is the process of recording and categorising financial transactions systematically. It involves maintaining accurate records of transactions, such as purchases, sales, and payments, and organising them into financial statements like balance sheets and income statements. 

Bookkeeping provides a clear and organized view of a financial situation and helps to ensure compliance with tax regulations.  It is more focused on the recording of financial transactions for a single entity or organisation.

Overall, bookkeeping is more important for maintaining accurate financial records even when it comes to cryptocurrency. 

Cryptocurrency Accounting

Cryptocurrency accounting, on the other hand, involves more complex processes that go beyond bookkeeping. 

It includes analysing and interpreting financial data to provide insights and guidance on investment strategies, risk management, and tax planning.

Cryptocurrency accounting involves a more detailed analysis of the transactions, including the calculation of gains and losses, cost basis, and tax liabilities.

Another significant difference between the two is that cryptocurrency accounting involves the management of multiple wallets, exchanges, and other platforms where cryptocurrencies are bought, sold, or stored.

However, cryptocurrency accounting provides a more comprehensive and sophisticated analysis of transactions and their financial implications.

Current Accounting rules and most frequently reported difficulties 

In September 2021, the accounting rules for cryptocurrency in the UK are outlined by the Financial Reporting Council (FRC) in their guidance document called “FRS 102 Section 28 – Cryptocurrencies”. 

This document guides how cryptocurrencies should be accounted for under UK Generally Accepted Accounting Principles (GAAP).

The FRC guidance states that cryptocurrencies should be recognized as intangible assets, which means they should be valued at their fair value at the end of each reporting period. The guidance also requires entities to consider the nature of the cryptocurrency they hold and determine if it is a financial asset or a non-financial asset.

In terms of difficulties, some of the most frequently reported challenges with accounting for cryptocurrency in the UK include

Valuation

The volatile nature of cryptocurrencies makes it challenging to accurately value them. There are often discrepancies in the prices of cryptocurrencies across various exchanges, which can make it difficult to determine their fair value.

Classification

There is a lack of clarity on whether cryptocurrencies should be classified as financial assets or non-financial assets. This can create confusion for companies when determining how to account for their cryptocurrency holdings.

Taxation

There is still uncertainty regarding how cryptocurrency transactions should be taxed in the UK, which can create difficulties in determining the correct accounting treatment.

Regulation

Cryptocurrency regulation in the UK is still evolving, which can create uncertainty for companies in terms of complying with reporting requirements and other regulations.

What is the best method to keep a record of the crypto transaction for tax purposes? 

The best method to keep a record of cryptocurrency transactions for tax purposes in the UK is to maintain accurate and detailed records of all cryptocurrency transactions. 

Here are some tips on how to do this effectively:

• Keep a record of each transaction: Record the date of the transaction, the amount of cryptocurrency involved, and the value of the cryptocurrency in GBP at the time of the transaction.
• Keep track of the type of transaction: Identify whether the transaction was a purchase, sale, exchange, gift, or any other type of transaction.
• Record any fees or charges: Note any fees or charges associated with the transaction, such as transaction fees, network fees, or exchange fees.
• Record the source and destination of the transaction: Note the source and destination addresses of the cryptocurrency involved in the transaction.
• Use reliable accounting software: Consider using reputable accounting software that is specifically designed for cryptocurrency transactions. Some popular options include CryptoTrader.Tax, CoinTracking, and Koinly.
• Keep a separate record for each cryptocurrency: Keep separate records for each type of cryptocurrency to make it easier to track your transactions and calculate your tax liability.
• Export data: It is essential that you export data from the exchanges as well as wallets that you use on regular basis.
• Recording the data: Even after submitting tax returns, it is important to keep the data secure.

It is also important to regularly review your records to ensure that they are accurate and up-to-date. Keeping accurate records will not only help you calculate your tax liability more easily but also provide evidence in the event of an audit or investigation.

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