What you need to know about accounting for Digital Currency

In the past 50 years, we’ve experienced one of the greatest evolutions in the payment industry: the credit card. Enabling people to make purchases and send or receive money digitally, the credit card minimized society’s use of cash and checks. For accountants, this introduced a new way businesses are paid and how they pay their employees, vendors and customers.

And now, just to keep us accounting and finance folks on our toes, we’ve been introduced to a whole new method of currency: the bitcoin.

What is a bitcoin?
A bitcoin is a cryptocurrency or digital currency. Did you know that the Bitcoins market is now almost $10 billion? According to Bitcoin.org, bitcoins’ value is derived from mathematics, rather than gold or silver. The value comes only and directly from people willing to accept bitcoins as payment. Basically, the more they are accepted, the greater their value. Even though when demand increases, the supply will never exceed 21 million bitcoins due to the configuration of the underlying algorithm.

A boom in bitcoins
There are many reasons bitcoin use has increased, including:

  • A lower risk of fraud as compared to using credit or debit cards
  • Inability for the purchaser to reverse or “chargeback” the transaction
  • Inability of the seller to add fees to the transaction
  • It is fast (no waiting for funds to clear the bank)
  • It is less expensive to send funds internationally
  • Personal information is never revealed

How to account for bitcoins
With the popularity of bitcoin, new issues arise in how to account for transactions using bitcoin as a payment method. In 2014, the Internal Revenue Service issued a notice that digital currency is to be treated as a property and that the principals applicable to property apply. This creates some interesting challenges when using bitcoins.

When accounting for bitcoins, there are a few important rules to follow:

  • Bitcoins should be characterized as Other Current Assets rather than cash.
  • Since most accounting systems require a cash account when paying bills or receiving payment, additional steps must be taken to book the transaction.
  • A revaluation and subsequent Depreciation/Appreciation entry should be booked at each reporting period using the value ascertained from bitcoin exchanges.
  • Any change in value should be taxed as a capital gains or loss.

As with any other asset, any appreciate or depreciation in value is not recorded for tax purposes until it is actually realized by selling or, in this case, spending the asset.

To avoid some of the accounting headaches related to accepting a digital currency, try using a payment processer, such as BitPay and Coinkite. Because the processer accept bitcoins and then pays you in cash, you never actually own any bitcoins.

As is evident by the growth and success of the bitcoin industry, other cryptocurrencies like Litecoin and Primecoin have begun entering the marketplace. And it’s only a matter of time before the next great algorithm is created.

Whether its bitcoins, balance sheets or the bottom line, navigating the changing industry trends and regulations is no easy feat. Enlisting the services of financial consulting firms like virtual CFO (vcfo) can ensure your business is profitable, compliant and successful.

 

Sharon Foster is a Consulting CFO for vcfo Austin. As a top financial consulting and HR consulting firm, vcfo provides contract CFO and CFO Consulting services, HR outsourcing and interim HR services. Additionally, we provide technology strategies consulting and cost-effective recruiting solutions. Whether you seek part-time, interim, project-based or full-time support, vcfo’s customizable engagement model will fit your specific business needs.