If there’s one thing we’ve learned over the last hundred years, it’s that the modern economy has the power to create value overnight. Whether it was the advent of the stock market or Euro, people have constantly proved that the concept of value is really in the eye of the beholder. With it, has come the need for innovation in the realms of accounting.
No more evident has this become, than the age of cryptocurrency, like Bitcoin.
What Is Bitcoin
Bitcoin is a type of digital currency that allows the free-flowing exchange of monetary funds without the need for physical money. Easily the most popular form of cryptocurrency, the value of Bitcoin is contingent on an algorithm that’s based on a decentralized system lacking any single bank or administrator. One way to think of it is cash but in the form of data. Each unit of currency is encrypted to verify transfer funds without the need for a centralized governing body. Essentially, the currency is ruled by math, and anyone can trade Bitcoin as long as they have a digital wallet. Wallets act as intermediaries, giving you an online address to wire Bitcoin to and from your contacts. Over the last five years, Bitcoin has grown tremendously in value, leading to more than a few overnight fortunes. The key now is for accountants to be able to find ways to manage this new form of money.
There are some important details one must consider when accounting for Bitcoin and other cryptocurrencies. The main idea that the IRS would like to get across is that Bitcoin is considered property in the United States, and laws that apply to property will also apply to cryptocurrencies that you own. The only time that it becomes a taxable income is when you use it to pay for goods or services, at which time the fair market value is used to calculate what you owe to the government. Gains and losses are calculated much like stocks, so accountants must be diligent when recording the value of the currency at the time of acquisition, compared to its value at the time of being spent. Finally, for regulatory compliance when accepting Bitcoins as income, accountants need to place the final values on Schedule C or 1120 Forms.
There’s a lot that goes into accounting for Bitcoin and other cryptocurrencies. In addition to this being an emerging part of our economy, there is also a lot of uncertainty when it comes to adhering to tax law. Our firm will help you stay up to date on all of the most recent rule changes so that your future is protected. After all, having a professional take care of it will not only free up valuable time for your business, it will also ease your mind.