Cryptocurrency is a digital currency transferred between peers and confirmed in a public ledger through a process called mining. These digital currencies only exist electronically and don’t have a central issuing authority or regulatory body.
They’re exchanged on a worldwide peer-to-peer network, submitted as an entry on a global ledger called the blockchain, a ledger of every crypto transaction ever made. While this record is decentralized, it is shared between all users of cryptocurrency and can only be updated with the consensus of the majority.
The result? A faster, cheaper and more secure way to complete transactions.
Accounting for Cryptocurrency
Currently, the US treats cryptocurrency as property. The IRS requires that the value of cryptocurrency be reported in US dollars with the fair market value determined at the time of payment or receipt. This calls for specific record keeping requirements and a way to accurately calculate crypto gains and losses.
If you’ve ever filed a personal tax return after buying and selling stock, you know that you must show what you bought the stock at and what you sold it at – these same rules come into play for businesses transacting in crypto.
Any time you pay or receive cryptocurrency, it’s like you’re transacting in stock. The only difference is that there’s a market of people that will take cryptocurrency in exchange for their services. So, let’s say you paid $1,000 for an Apple stock that later appreciates to $2,500. When you go to pay someone with that $2,500 in Apple stock, you’ve actually gained $1,500 in value.
On the flip side, if you’re a business willing to accept cryptocurrency for the services you distribute, it should be treated like someone is paying you with shares of stock. So, if someone paid you 20 shares of Amazon, you would record that as revenue. Amazon’s stock price goes up and down and, at some point, you’ll probably choose to sell it or pay someone with it. Cryptocurrency functions in much the same way.
Over the last few years, cryptocurrency has gone mainstream, and nowhere is this hype more apparent than in the world of tech. Many entrepreneurs and investors are eager to test the waters of Initial Coin Offerings, also known as ICOs, the cryptocurrency version of crowdfunding. And for good reason. In 2017 alone, ICOs have raised more than $1 billion.
Breaking it down further, when it comes to wrapping your brain around modern currency, it helps to break things down into three main buckets:
- Cash (the medium of exchange backed by your government)
- Cryptocurrency (a digital asset such as Bitcoin, Ether, etc.)
- Tokens (assets or equity that represent a specific value often associated with ICOs
Editor’s note: This is really only the beginning and how exactly cryptocurrency and blockchain in general will impact the accounting profession around the globe remains to be seen, though we are just starting to witness the effects.