Cryptocurrency accounting is not for the faint of heart. The world of virtual currencies is constantly shifting and changing — dealing with cryptocurrency accounting by yourself is a brave proposition!
If you’re looking for a professional cryptocurrency accountant, feel free to request a free consultation with Founder’s CPA. As a leading provider of cryptocurrency accounting services, Founder’s CPA is more than happy to help you with your accounting needs.
What Is Cryptocurrency?
Cryptocurrencies are on the cutting edge of technology. In a nutshell, cryptocurrencies are virtual “currencies” traded or exchanged online. These virtual currencies utilize something called blockchain technology — a decentralized public ledger of all transactions — to ensure security.
To keep things simple, imagine you have a spreadsheet on your computer. In that spreadsheet is a record of different transactions. If you want to change that spreadsheet (say, change a transaction from $1000 to $500), all you need to do is hit a key on your keyboard and voilà — done!
With blockchain technology, that same spreadsheet is now loaded on many different computers around the world. It’s constantly updated. So, if you want to change that $1000 amount to $500…well, you’d need to get every person on the network to hit their keyboard. That’s effectively impossible.
Instead of changing the spreadsheet (the “chain”), you make a new addition to it (the “block”). When you make a new block, it gets sent to all the spreadsheets on the network — making it permanent — and the record is sealed. You’re using this decentralized, “public” (public, yes, but highly encrypted and confidential) ledger instead of your own spreadsheet.
How Is Cryptocurrency Treated by the IRS?
In 2014, the IRS issued a publication seeking to clarify exactly how it would treat virtual currency. That publication is still applicable today.
In that document, the IRS decided to treat cryptocurrencies as property. Specifically, the IRS disavowed the idea that it would treat cryptocurrencies as regular currency. Instead, the IRS determined that virtual currencies do not have legal tender status.
What Does That Mean for Taxation?
Because the IRS considers cryptocurrencies to be property, as of this writing, you do not owe taxes until a taxable event occurs. A taxable event occurs when you exchange currency for goods or services (among other things).
Rule of thumb? Treat virtual currencies as you would any other investment. If you purchase cryptocurrency and sell it for a profit, you’ll generate a tax liability. If you purchase cryptocurrency and sell it for a loss, you’ll have (potentially) deductible capital losses.
Confused about how technical this cryptocurrency taxation topic is? If so, you’re not alone. We’ll break down some basic cryptocurrency taxation examples below.
We encourage you to reach out to Founder’s CPA for a free consultation. A little free advice now may go a long way (and it really is free).
If you purchase a virtual currency today for $1 and sell it tomorrow for $2, you’ll have created a taxable event. That $1 profit is subject to federal short-term capital gains tax. Currently, the IRS taxes short-term capital gains in the same manner as ordinary income. Short-term capital gains tax applies to investments held for one year or less.
Likewise, if you purchase a virtual currency today for $1 and sell it five years from now for $10, you’ll owe long-term capital gains tax on that profit. The IRS taxes long-term capital gains at much more favorable rates (zero percent, 15 percent and 20 percent depending on your income bracket). Long-term capital gains tax applies to investments held for over one year.
What Does a Cryptocurrency Accountant Do?
A professional cryptocurrency accountant takes a hands-on approach when it comes to dealing with the complexities of IRS tax law. The intricacies of IRS tax law are difficult to navigate without help.
The right cryptocurrency accountant will help you do the following (and more):
- Calculate capital gains
- Determine tax liability
- Determine cost basis
- Calculate FMV
- Ensure tax compliance
Calculates Complicated Capital Gains and Losses
If there’s one thing the IRS is adamant about, it’s you paying your taxes (and paying the correct amount). Calculating short- and long-term capital gains and losses is a complicated, difficult process that professional cryptocurrency accountants can help with.
Determines Tax Liability
Many investors involved in virtual currencies trade many different currencies (and frequently). Unfortunately, many online virtual currency exchanges provide limited tax support: you’re often on the hook to determine your own tax liability.
A certified cryptocurrency accountant can work wonders when it comes to figuring out what exactly you owe.
Determines Cost Basis
Cryptocurrency cost basis calculations can be the stuff of nightmares. Virtual currency exchanges don’t report their cost basis, often do not provide you their gain, and require you to sit down and puzzle through potentially hundreds of manual calculations!
The worst part? A mistake here is nothing to sneeze at: it can throw off your entire calculation. Remember, your cost basis is essentially how much money you’ve put into purchasing your virtual currency. Missing or incorrect data here can lead to trouble at tax time.
In our taxation examples above, the math was deliberately simple: buying single units of virtual currencies and selling them for “clean” amounts later on.
The hustle and bustle of cryptocurrency get a lot more complicated when investors trade, exchange and sell cryptocurrencies for other virtual currencies. It’s at this point where contacting a professional cryptocurrency accountant can really pay off!
Calculates FMV for Taxable Events Depending on the Time and Date of Investment
The IRS uses something called “fair market value” (FMV) to determine income and amounts realized. If you’re trading virtual currencies on any number of major exchanges, the end-of-day rate is what determines the FMV. Of course, if you’ve got months of daily transactions, calculating the FMV for all your taxable events becomes a lot harder!
Worse yet, some virtual currency exchanges do not keep a full record of the FMV of your transactions.
Keeps You Safe From Penalties and Tax Noncompliance
For the discerning investor, virtual currencies are fascinating (and lucrative) opportunities. However, ensuring compliance with state and federal tax law is of the utmost importance. Tales are already circulating in accounting circles of cryptocurrency investors who thought they could skirt around the edges of tax law.
Some cryptocurrency investors feel that the IRS is either unable or ineffective at enforcing tax law on virtual currency investments. Rest assured, nothing could be further from the truth — the IRS is ramping up its efforts to ensure tax compliance across the board!
The penalties for tax noncompliance are nothing to sneeze at. The fines and penalties for incorrect returns alone are high — the risk of willful tax noncompliance is simply too high.
Certified cryptocurrency accounting firms like Founder’s CPA can help. If you’re worried about calculating your own tax liability or would like a free consultation, feel free to reach out. A bit of advice now can go a long way toward alleviating headaches in the future!
What Sort of Services Should I Look For?
Searching for the right cryptocurrency accountant isn’t easy. The benefits of a full-service accounting firm are hard to beat: financial strategy, bookkeeping services and financial consulting (to name a few).
Tax Compliance and Financial Strategy
As mentioned above, tax compliance is the No. 1 service consideration for anyone looking to bring in an outside accounting firm. However, a firm like Founder’s CPA goes above and beyond to offer advanced financial strategy and investment advice.
A second set of eyes (from a firm that specializes in small business accounting and virtual currency) provides invaluable insight. The right tax strategy is one customized to your specific needs — there’s no one-size-fits-all in the finance world. Founder’s CPA breaks down your exact tax requirements, crafts a tailor-made plan for moving forward, and works with you to implement that plan.
As cryptocurrency continues to grow, bookkeeping services must keep pace. After all, a good portion of the complexity of virtual currency tax law is the difficulty in keeping accurate books by yourself!
Look for an accounting solution that includes in-depth bookkeeping services. Much like your financial strategy, the best solutions take into consideration your exact requirements and go from there. At Founder’s CPA, we know how frustrating cryptocurrency bookkeeping can be — it’s a great idea to find a cryptocurrency accountant that will handle this for you.
Founder’s CPA offers the following and more:
- Software recommendations
- Bank reconciliation
- Data integration
- Strategies to reduce taxable income
Financial Consulting and Analysis
Cryptocurrency is a new, untested field. You’re already making the right step by reaching out to professional cryptocurrency accountants: Expert advice is invaluable. A full-service accounting firm can provide financial consulting and ad-hoc analysis on top of bookkeeping solutions.
Why Founder’s CPA?
If you’re looking for a full-service cryptocurrency accountant or accounting firm, Founder’s CPA is an excellent choice. We specialize in accounting services for startups, small businesses and cryptocurrency investors.
Cryptocurrency and hyper-growth startups go hand-in-hand. Both virtual currencies and rapidly expanding businesses experience incredible growth in often untested waters — Founder’s CPA thrives in that environment.
Our accounting services include:
- Outsourced CFO services
- Budgeting and forecasting
- Accounting technology consulting
- Financial consulting
Each client presents a new set of unique opportunities. With our years of experience in tax compliance, bookkeeping and financial consulting, Founder’s CPA is ready to help take your cryptocurrency investing to the next level.
Founder’s CPA: Full-Service Accounting Solutions
If you’re investing in cryptocurrency (or thinking about it), your time is precious. Professional cryptocurrency accountants help eliminate the stress of worrying about your tax liability — leaving you to focus on what really matters.
If you’re looking for a cryptocurrency accountant, look for a firm that offers a wide range of services. In particular, focus on tax compliance and efficient bookkeeping — these two services are indispensable for any virtual currency investor.