Editor’s Note: the following is a guest post submitted by ZenLedger.
Bookkeeping is the cornerstone of any business. You need an organized record of all the transactions that occur within an organization before you can understand the cash flow within your business. It’s why everyone from solo practitioners to nonprofits, to multinational conglomerates, entrust professional CPAs with the vital task of balancing the books.
So much of bookkeeping is about classifying and recording transactions. Clients rely on CPAs to demystify exotic asset classes and ensure they remain compliant with tax codes, laws, and regulations. With the increase in demand for cryptocurrencies, it pays to be informed.
If you’re a CPA, it’s only a matter of time before a client asks you about dealing with cryptocurrency.
What happens when you receive payments in crypto? How do you classify the buying, selling, and trading of cryptocurrencies? In this post, we’ll answer these and other questions. Here are 8 bookkeeping tips for Crypto CPAs.
What is Cryptocurrency to a CPA?
To the rest of the world, cryptocurrency is a digital currency that uses encryption to regulate its “printing,” verify transactions and maintain a transparent, distributed, ledger called the blockchain.
To a CPA, crypto isn’t currency, it’s property. The IRS, along with the tax organizations of most developed countries, classifies cryptocurrency as property subject to capital gains taxes.
This means even if your client treats crypto like a currency and, say, purchases a Bugatti Veyron with bitcoins, they could still owe a hefty capital gains tax on the transaction. The purchase is treated as the sale of property. If the bitcoins appreciated in value since the client purchased them, they owe capital gains taxes based on the value of bitcoin at the time of the sale.
And while there used to be some ambiguity surrounding “like-kind exchanges” of one cryptocurrency for another, the new US tax code amends IRC Section 1031 (a)(1), closing that legal loophole and making all cryptocurrency trades a taxable event.
Bookkeeping Tips for Crypto CPAs
So we know we owe taxes on all crypto transactions, including the purchases of goods and services, and like-kind exchanges. Since the rest of the world treats cryptocurrency like currency, but tax organizations treat it as property, your bookkeeping can get pretty complex. Here are some tips to help you keep your books on the straight and narrow.
Tip 1 – Every crypto transaction is a taxable event. It’s worth repeating that buying, selling, or trading cryptocurrency results in capital gains or losses. That holds even if you buy goods and services using crypto (it counts as selling an asset) or trade one cryptocurrency for another (e.g. Bitcoin for Ethereum).
Tip 2 – Hold crypto for more than a year.
As a taxable event that generates capital gains or losses, it’s possible to take advantage of the lower long-term capital gains tax rate on cryptocurrency transactions.
Tip 3 – Payments in crypto are treated as ordinary income.
If you’re on the receiving end of a crypto payment in exchange for goods, services, or as a salary, you can treat it as ordinary income at the fair market value of the crypto at the time of receipt.
Tip 4 – No capital gains taxes on crypto donation to tax-exempt charities in the USA.
You do not have to pay capital gains taxes on crypto donations to IRS-recognized tax-exempt charities (e.g. 501(c)(3) status). You can even deduct the donation from your taxes based on the fair market value of the cryptocurrency at the date of the transaction.
Tip 5 – Treat airdrops, forks, and mining as taxable income.
Airdrops, forks, and crypto mining seem to generate money from thin air, but they are still subject to taxes. IRS policy is to treat the new crypto as taxable income based on the fair market value at the time of the transaction. Crypto mining equipment can be deducted as a business expense.
Tip 6 – Consider instantly changing crypto into cash.
If you allow clients to pay you in cryptocurrency, there are many services available that let you instantly turn it into cash. This reduces the volatility risk of dealing with cryptocurrencies and can simplify your bookkeeping while still allowing you to accommodate customers’ preferred legal tender.
Tip 7 – Pay attention to regional laws and regulations.
Cryptocurrency is a new asset class. Laws and regulations vary from country to country. States may have their own additional tax regulations surrounding crypto. It’s important you understand your local tax regulations regarding cryptocurrencies you should calculate your Crypto taxes.
Tip 8 – Use crypto tax accounting software.
It’s important to be proactive, rather than reactionary when dealing with the IRS. Accurate self-reporting is the best way to get ahead and avoid legal penalties and fees. ZenLedger a Crypto tax service enables you to import cryptocurrency transactions, calculate gains and income, and auto-fill tax forms like 8949, Schedule D, FinCen114 & FBAR.