Modern Accounting For Bitcoin
What Blockchain Means For The Future Of Accounting Practices
While I haven’t been an accountant for as long as some seasoned financial professionals, I have been in the game for long enough to see trends come and go. I have witnessed the tail end of the subprime mortgage crisis and have heard stories from veterans about the dot-com bubble in the late 90s. One thing that has remained the same throughout all these experiences, based on my experiences and the experiences of my peers, is the core value of all these assets. Whether it’s a web domain, a property, a rare earth mineral or a fossil fuel, all forms of capital that I have worked with track their gains and losses based on a dollar value.
With the advent of cryptocurrencies like Bitcoin, it is entirely possible that this time-tested financial framework is about to change. Using the power of the blockchain, the entire concept of money is being turned on its head through the rise of this new data-based currency. Although our current understanding of currency has transformed within the past few decades thanks to credit cards and fiat, cryptocurrencies are the logical next step in this evolution.
This is understandably concerning for accountants, but what does it mean for entrepreneurs? Well, anyone interested in starting or maintaining a successful business is going to need a competent accounting team. As the financial landscape changes, the experience and insight needed by business accountants will change as well. Understanding this upcoming paradigm shift can better help entrepreneurs future-proof their organizations and may even help them to save money on accounting-related business expenses.
Brief Summary Of Modern Accounting For Bitcoin
The current financial paradigm views Bitcoin, Ethereum and all other cryptocurrencies as assets. In the United States, for example, any form of cryptocurrency is considered property instead of currency. Although the IRS acknowledges that Bitcoin can function as “a medium of exchange,” it is not classified as currency due to the fact that it also commonly functions as “a unit of account and/or a store of value.”
Because of this classification, changes in value and quantity of cryptocurrency is taxed to be capital gains or losses. Obtaining larger quantities of bitcoin, either through mining or buying it, will result in an increase in capital, making it subject to capital gains tax. The same is true for trading or selling cryptocurrency, as these events are considered taxable as gains or losses of capital. Therefore, accounting for holdings in bitcoin or other altcoins would be done in much the same way that other forms of equity are, such as property or stocks.
