Cryptocurrency has experienced exponential growth over the last few years. Because of this, businesses need to understand blockchain accounting and how to track crypto transactions. The invention of blockchain accounting software is further revolutionizing the accounting industry.
What this means is that no business should still be tracking crypto transactions (Bitcoin and Ethereum) manually. If your business is receiving crypto assets, then you need to make use of blockchain accounting software. Beyond tracking your crypto revenue, it also makes it easier to pay your employees using crypto assets and calculate the taxes triggered by using crypto to pay employees.
Balancing this with your fiat money transactions is quite stressful (not to mention, filing taxes with crypto). This is one of the reasons why using crypto accounting software is essential. Now, you don’t have to manage separate records. In this post, we will show you how to choose the right software and lots more.
The Need for Detailed Cryptocurrency Records
First of all, it is important to note that the IRS doesn’t consider cryptocurrency as a currency for tax purposes. Instead, it regards it as “listed property” and treats it similar to stock for tax purposes. If this is the case, why then should businesses have detailed cryptocurrency records? Check out some important reasons below:
Many businesses are still caught up in the confusion of whether they should accept cryptocurrency payments or not. It all depends on your preferences and tolerance for tracking everything appropriately. Accepting crypto assets isn’t a problem as long as you are ready to do the additional work.
The IRS requires businesses to remit taxes on all income earned, whether in fiat money or assets. Without detailed cryptocurrency records, it will be impossible to achieve this. As you can tell, not filing your taxes as the IRS requires could get your business into a lot of trouble. However, there really are only two key pieces of information you need to know to accurately calculate your crypto taxes
Your cryptocurrency records must contain two important pieces of information:
- The date that you received or acquired the cryptocurrency, the amount acquired, and the fair market value in dollars of the asset on that date
- The date that you sell the cryptocurrency or used it to make payment for goods or services, the amount sold, and the fair market value in dollars of the asset sold on that date
Having the details outlined above for both the acquisition and the disposition date is critical. If you can keep track of this information, it is easy to file your taxes appropriately.
Track gains and losses
Another very important piece of information that detailed software provides are gains and losses, sometimes referred to as “portfolio trackers.” Essentially, it’s a dashboard showing how much a particular asset (coin or token) has gone up or down — in relation to an actual currency.
For example: If you bought a single Bitcoin at $20,000 USD, at the recent high (of $60,000) you’d have a gain of $40,000 USD.
This information is commonly available, now, in the exchange you purchased the crypto (e.g. Robinhood shows your purchase price, current price and your gain/loss). However, it may not be your full portfolio. For instance, if you have a portfolio consisting of Bitcoin, Litecoin and Doge; your exchange may not show the gain/loss of your entire portfolio.
A quality crypto accounting software should show you both an itemized gain/loss (for each crypto) as well as a combined portfolio gain/loss.
Not losing wallet information
Crypto wallets are software that helps to keep track of secret keys used in signing crypto transactions. The easiest way to think of crypto wallets are as the crypto equivalent to a bank account. The keys stored in the wallets are the only proof of ownership a person has to these digital assets. This is why they are critical to the completion of crypto transactions.
As the world of cryptocurrency evolves and more businesses are adopting the idea, these wallets are becoming more important. They aren’t just a place to store keys. They can do a lot more, depending on how far innovation will take us.
There are several kinds of crypto wallets including desktop wallets, online wallets, mobile, hardware and paper wallets. Different kinds of wallets have different levels of security. Regardless, the onus is on the owner to protect the wallet information as much as possible.
Some wallets are multi-currency while others can only work for single currencies. Losing your wallet information, especially if the wallet handles multiple currencies could be devastating. An easy way to protect such information is by keeping multiple copies of your private keys safely stored in a secure manner..
Choosing An Accounting Tool For Crypto
With the information that we have discussed above, you must be itching to know about accounting tools for crypto. In reality, it is very difficult to choose the best accounting tool for crypto because of the wide variety available. However, in this section, we will discuss a few factors to consider and introduce you to a special accounting tool.
Before we go ahead, allow us to introduce you to our preferred accounting software solution, CoinTracking. This software makes it possible to analyze trades while it also generates real-time profit and loss reports. Another thing that you will enjoy from using CoinTracker is checking the current value of different coins. More than anything else, it helps businesses to calculate their taxes with ease.
This app is designed for use in different countries which makes it a one-stop crypto accounting solution for businesses. So if your business has just started to accept crypto as payment, you should consider using this app.
Below are some of the benefits of using CoinTracking:
- Detailed profit/loss reports utilized in the personal analysis
- Allows easy import from more than 110 exchanges
- Syncs directly with blockchains like Ethereum and Bitcoin
- Allows you to export reports in a variety of formats including PDF, XML, Excel, etc.
- Provides tax reports for more than 100 countries
- Presents users with chart histories for 9543 coins along with trends, analysis and statistics
- Very secure as it allows 2-factor authentication and also ensures API and data encryption
To get the best cryptocurrency records, you still need the help of a CPA firm that understands crypto accounting. They shouldn’t just have this knowledge, they must also be savvy with the right tech to use. This will ensure that you don’t make mistakes in tax filing and your business doesn’t get into trouble.
Integrations with cryptocurrency exchanges
A cryptocurrency exchange is an online platform where you exchange digital assets based on the current market value. There are many crypto exchanges available. Below are some of the best that businesses use:
- Coinbase and Coinbase Pro
It doesn’t matter which exchange you use, what matters is that the blockchain accounting you use can integrate with it. The software we discussed above, integrates with over 110 exchanges. This way, you are allowed the freedom to use as many exchanges as you want without worry. And you will still get detailed reports since the software integrates seamlessly with the exchange. This is one of the most important criteria for choosing blockchain accounting software.
Crypto asset management
An efficient blockchain accounting software should allow you to easily manage your crypto assets. As we mentioned earlier, it is possible to be signed up to several exchanges and have multiple crypto wallets. The software should make it easy to view all your crypto assets from one platform. This is where the rubber meets the road.
There shouldn’t be fragmentation or a need to dig beyond one single software platform to understand the value of your whole crypto portfolio.. As long as you have uploaded the exchange accounts and wallets to the app, you should see them easily. This way, you can track how much you currently have of each cryptocurrency as well as transactions in a detailed manner.
Along with this, the software should make it easy to track your outgoing and incoming payments if you use crypto for these purposes. Without this, you will find it difficult to track gains and losses that you’ll need to accurately report taxes each year. All of these make business accounting a lot easier to achieve.
Detailed transactional accounting and reporting
Now you know how important it is to track when you receive or sell cryptocurrencies. You must also track how you spend these coins. This way, you know how much the coins are worth at the time of each transaction. Without this knowledge, it is almost impossible to track profits and losses or even file taxes on these digital assets.
An efficient blockchain accounting software makes all of this possible. It tracks transactions in real-time to help eliminate surprises on what your potential tax liability may be for your crypto activity. Such software should even track transfers between wallets since such transfers look like incoming and outgoing transactions. It should ensure that the process is not just detailed but easy to carry out and refer to in the future and you can account for every asset that you own and feel confident that you’re reporting your crypto activity accurately.
Accounting For Cryptocurrency
So far, we have shown you how important it is to make use of blockchain accounting software. While it is great, subscribing to an app like CoinTracking, navigating tax prep when you’ve bought and sold crypto is still tricky.
At Founder’s CPA, we specialize in filing taxes of individuals and businesses with a crypto portfolio. Get in touch to see how we may alleviate the stress of reporting your cryptocurrency taxes.