Cryptocurrency is a digital representation of value. The name is derived from the use of cryptography to secure blockchains without a third party & without having to trust the participants. The first cryptocurrency, Bitcoin was created by Satoshi Nakamoto in 2009. The cryptocurrency market is now worth more than $250 billion and growing every day.
Cryptocurrency transactions are visible on a public online database or blockchain. The blockchain shows the cryptocurrency in account numbers called addresses, a complex string of about three dozen numbers and letters. They are based on blockchain technology. Miners process transactions. Those who mine new blocks are rewarded with cryptocurrency for their work. Blockchain uses a distributed ledger system that essentially requires all participating networks to agree to any new inputs, and previously recorded transactions cannot be altered. Once created, cryptocurrencies can be used to pay for goods or services or traded on exchanges like any other currency.
Accounting for Cryptocurrencies
For federal tax purposes, cryptocurrency is considered property. Tax principles that apply to property apply to them. Cryptocurrency is not treated as currency to determine losses or gains under tax laws.
Taxpayers must include the fair market value of the virtual currency as taxable income when it is used to pay for goods or services. The fair market value is determined as of the date acquired; basically it is (virtually) exchanged for U.S. dollars for tax purposes.
Accounting services must note that when cryptocurrencies are accepted as income, a valuation strategy is to be chosen, placed on the Schedule C or 1120 Form, and reduce business expenses throughout the year. The most important accounting practice is to record the cryptocurrency value at the time of receipt and at the time of spending it. That way, gains, and losses can be accurately calculated.
How is cryptocurrency taxed?
The Internal Revenue Service issued a notification in 2014 stating that cryptocurrency will be treated as property for federal income tax purposes. Depending on how the cryptocurrency is held, it could be classified as business property, investment property, or personal property.
In addition to the nature of the gain, it is critical that owners of cryptocurrency track their basis. Every time cryptocurrency is used for the exchange of goods or services, a taxable transaction occurs. For example, taxable events include selling cryptocurrency for fiat currency, trading cryptocurrency for other cryptocurrency, using cryptocurrency to buy a service or good, receiving cryptocurrency as a result of mining, or the receipt of cryptocurrency for services. Other complexities around the taxation of cryptocurrency exist and it is very important that individuals and businesses continue to monitor future guidance.
Please feel to get in touch tax experts at GKM to find out how we can advise you on the rules & regulations for accounting & tax treatment of cryptocurrencies. (info@gkmtax.com).
