In the realm of crypto assets, there are currently no specific accounting standards. Instead, businesses rely on broader guidelines such as the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Practice (GAAP) to handle cryptocurrency accounting.
Balance sheets are one of the three main financial statements that businesses need, along with income and cash flow statements. While income and cash flow statements show a business’s economic activity over a period of time, a balance sheet provides a snapshot of its assets, equity, and debt.
Balance sheets are also known as statements of financial position because they give a complete overview of a business’s financial situation. They include every journal entry since the business’s inception, making it necessary to include crypto transactions that impact the financial situation.
Why are balance sheets important? They offer valuable insights into a business’s financial health and provide several key benefits. By comparing balance sheets year-over-year, businesses can track their growth and progress. Balance sheets also allow for the calculation of important financial ratios, such as the debt-to-equity ratio and current assets vs. current liabilities. Additionally, balance sheets facilitate the evaluation of a business, which can be useful for attracting investors or selling the business.
So, how should crypto be treated on a balance sheet? While there are no specific guidelines for crypto accounting, the fundamental principles of accounting for assets apply. When purchasing cryptocurrency with fiat money, it should be recorded at its fair market value on the date of purchase. This reflects as a debit on the assets account, while the cash account reflects the credit for the purchase price.
When selling cryptocurrency for fiat money, the assets account is credited, and the cash account is debited with the amount received. If there is a significant difference between the sale amount and the original purchase price, a capital gains account should also be credited.
Unrealized losses should be recorded based on GAAP’s accounting rules for intangible assets. Any decrease in value should be recognized as a loss, even if the asset later recovers. Mining income from cryptocurrency should be recorded on the balance sheet as other income-generating activities. Mining expenses should also be accounted for.
When using cryptocurrency to pay suppliers, it is considered a disposal and should be recorded similarly to selling the cryptocurrency. A capital gain or loss will be recognized for the difference between the expense and the book value of the asset.
Tax compliance is an essential aspect of accounting for cryptocurrencies. Capital gains tax is incurred when the profits from capital disposal exceed the purchase price, while capital losses can help reduce tax liability. Income tax liability arises when someone is paid in cryptocurrencies, and corporation tax must be paid on trading profits.
It is important to note that accounting and taxation rules do not always align. Unrealized losses may require journal entries under both IFRS and GAAP rules, but there may not be a tax deduction for such losses. Cryptocurrency transactions can be split into two groups for accounting purposes based on whether they generate income taxes or capital gains taxes.
Taxable events that trigger income taxes include selling, exchanging, and using cryptocurrency to pay suppliers. These events should be recorded as gross revenue for the year, and the associated expenses can be deducted. Non-taxable events do not contribute to the tax liability and should be recorded accordingly.
Accurate accounting for gains and losses is the foundation of prudent financial management. It ensures transparent and trustworthy financial reporting, which is crucial for stakeholders to evaluate a business’s performance and financial health. By complying with accounting laws and principles, businesses can make informed decisions that lead to long-term success.