How to Do Accounting for Cryptocurrency Transactions
Many think cryptocurrency is an accountant’s nightmare. But, usually, when someone says that it can be difficult to keep track of everything and file the right paperwork, that just means they lack the experience and understanding needed to do accounting with cryptocurrency. In this article, we’ll discuss everything you need to focus on so you can improve the process when you’re planning to delve into the cryptocurrency market. That said, let’s get to it.
Understanding crypto finances:
The first thing you need to do when you’re venturing into any accounting field is to make sure that your finances are set up correctly. One mistake that people often make when working with cryptocurrency is that they treat it as actual money. In reality, the IRS lists cryptocurrency as an asset or property. Therefore, you need to base your accounting plan around that idea. You should treat cryptocurrency more like stocks rather than actual money in an account.
How to record a crypto transaction in your ledger:
If a customer pays you two Bitcoin worth of items on May 10th for your service, you will need to record that payment in the asset section of the ledger, not in the cash section. You will also have to write down the total monetary value of the amount of crypto you received using the transaction rate at that time. This means that you will need to list that coin, its value, and the date on which you received it.
If you decide to sell the two coins you received on May 10th at an increased value, you will need to note down the differentials in the transaction to see the profit you’ve made. For example, if you received those two coins when they were worth $1,000 and you sold them at $1,500, you will need to cut $2,000 off the crypto section, add $1,000 to the cash section and note it as profit from the transaction. You may have to make a new account and name it “gain/loss from crypto” so that you can keep track of the net positive/negative of all the transactions.
Payments to vendors:
When you’re looking to record your transactions to vendors, you will need to make sure that the overall trade value of those transactions is more than $600; otherwise, it’s usually not worth the trouble. You will need to file the 1099-MISC form to the IRS as evidence for those payments.
Luckily, there are easier ways to set up a crypto account so that it’s less complicated for both parties. One of these ways involves setting up an automatic crypto account you can use to pay and receive payments in cryptocurrency. These accounts will record the transactions for you automatically, which will make it less complicated and confusing on your end. It will record the value of the coins at that specific time and once you trade or sell those coins away, it will then account for how much you gained or lost from those transactions. You can then use the spreadsheet from these transactions as evidence for your tax filing.
Concerns to be aware of:
To help you avoid issues such as tax evasion or money laundering, you will need to treat crypto transactions as if there were actual money involved. This is why you need to record the value of the coins, as well as add and deduct the value of the coins to your cash account.
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