Increasingly embraced by the financial markets and investors, cryptocurrencies such as Bitcoin and Ethereum present a new set of challenges for bookkeepers and accountants. While the official status of cryptocurrencies remains murky, they are slowly but surely making their way into real world transactions for goods and services, lending them a sort of dual nature as both commodity and currency.
This makes it all the more important for bookkeepers to understand the basic ins and outs of accounting for cryptocurrency. After all, properly accounting for your Bitcoin or Ethereum transactions, or those of your clients, will save you a lot of time, money and hassle down the road.
Here’s a quick list of the absolute must-knows:
- Cryptocurrencies are NOT currency. In Canada, cryptocurrencies are not considered legal tender. They are, instead, viewed as a commodity, and therefore handled as an investment. This means they can be managed and accounted for in the same way one accounts for other securities, such as stocks, bonds or ETFs.
- Every cryptocurrency transaction creates a TAXABLE EVENT. Whether buying, selling or trading, any gains or losses that result are taxable. If the transaction is between two cryptocurrencies – say you sell some bitcoins to buy Ethereum – then the selling price of your bitcoins becomes the cost base for your Ethereum.
- Accounting for cryptocurrency is harder when more than one cryptocurrency is involved. Buying, selling and transacting between more than one cryptocurrency essentially layers multiple calculations of cost bases, fair market values, adjusted cost bases, gains and losses on top of each other. This level of accounting is more time-intensive and relies on solid bookkeeping.
- Capital gains/losses must be calculated based on the ADJUSTED cost base. The adjusted cost base is basically the average cost for all of the cryptocurrency you’ve acquired, from the first bitcoin you purchased to the most recent. If you’re working across multiple cryptocurrencies, then you must calculate the adjusted cost base separately for each type of coin.
- The Canada Revenue Agency doesn’t audit crypto-transactions … YET. Just because the CRA can’t do this today doesn’t mean they won’t be able to in the future, and they may not be so forgiving if they uncover a long history of unreported gains. In the long run, the best way to protect yourself (or your client) is to report any gains/losses as you would for stocks.
- It’s wise to sell some cryptocurrency for CASH. If and when you do report your crypto gains/losses – and I highly recommend that you do – remember to sell some of your cryptocurrency for cash. Why? Simple. The CRA isn’t accepting bitcoins just yet, so you’ll need the cash in order to pay your taxes!
- The value of a transaction is determined by the FAIR MARKET VALUE on that day. This goes for any cryptocurrency transaction, whether as a commodity trade or a payment. For example, if you sell bookkeeping services and your customer pays you 0.00563 bitcoins, then your revenues are 0.00563 x the sell price of a single bitcoin at the exact moment the bitcoins are received. (Note: You must also remit GST/PST/HST based on that sale.)
- The distinction between HOBBY AND BUSINESS trading has major tax implications. If the cryptocurrency transactions in question are being conducted as a hobby, then any gains made are capital in nature. This means that only 50 percent of those gains will be taxed. If these are business transactions, then 100 percent of the gains are taxed, just like business income.
- Cryptocurrency remains a VOLATILE financial instrument. Cryptocurrency regulations vary widely across countries. In some nations, such as China, use of cryptocurrencies remains illegal. It is wise for bookkeepers and accountants to be familiar with these distinctions in order to ensure regulatory compliance, especially if cryptocurrency is being used for international transactions.
- Due to their anonymity, cryptocurrencies may be used to conduct ILLEGAL activities. Cryptocurrencies are unregulated by banks or governments, and as such, law enforcement agencies have a difficult time policing their use. The result is that cryptos are often used for money laundering, tax evasion and other illegal practices, meaning large or frequent crypto-transactions could draw some pointed attention. Protect yourself and your client by knowing exactly why each crypto-transaction was performed, and by having the impeccable bookkeeping to prove it.
- Mining Bitcoin is the act of “creating” new bitcoins – it’s also considered a BUSINESS. Cryptocurrencies acquired through this activity (Bitcoin and several others) are essentially considered a form of compensation, in exchange for the miners having provided a service to the block chain network through use of the individual’s computer, internet and energy resources, or other method. Any cryptocurrency earned in this fashion should be treated as income and reported.