The Complete Guide To Crypto Accounting & Taxes
Businesses, large and small, are adopting cryptocurrency, making it important to learn how to manage crypto accounting. Our guide gives you all the tips you need to know.
Businesses, large and small, are beginning to adopt cryptocurrency, making it important to learn how to document cryptocurrency transactions for accounting purposes. Accepting Bitcoin and other cryptocurrency payments propels your business into the world of virtual payments, but it also muddies your business’s accounting and tax returns.
Unfortunately, crypto accounting is challenging. This is largely due to the lack of cohesive accounting and tax protocols set for virtual currencies. For small business owners, unclear cryptocurrency tax and accounting guidance can be both an obstacle to implementing crypto and a financial headache once you have done so.
The upside here is that there are some established methods of crypto accounting and IRS guidance on how to treat cryptocurrency on your tax returns. The information is just scattered about.
This guide brings it all together. We’ll take a deep dive into cryptocurrency for businesses, including how to manage your accounting for crypto transactions and report them on your tax returns. Here’s what you need to know.
Table of Contents
- Do You Have To Pay Taxes On Bitcoin & Cryptocurrency?
- Understanding Crypto Accounting Tax Laws
- When To Report Bitcoin & Crypto Transactions On Taxes
- How To Record Crypto In Your Accounting Software
- What Accounting Records Do You Need To Keep On Cryptocurrency Transactions?
- The Bottom Line On Crypto Accounting & Taxes
- Crypto Accounting FAQs
Do You Have To Pay Taxes On Bitcoin & Cryptocurrency?
Yes, individuals and businesses are responsible for paying taxes on virtual currency transactions, including selling, exchanging, buying, and spending crypto.
These taxes apply to virtual currency forms such as Bitcoin and any other cryptocurrency used in place of real currency or that has an equivalent value in real currency.
Understanding Crypto Accounting Tax Laws
For tax purposes, cryptocurrency transactions are considered taxable as income or property.
A crypto transaction is categorized as income or property, depending on how the crypto was obtained and subsequently handled.
If the cryptocurrency transaction is deemed taxable, it is taxed at the same rate and in the same way that traditional property or income is taxed.
For a business, this means that a cryptocurrency transaction may be deemed taxable if:
- Your business earns income after being paid for goods or services with cryptocurrency
- Your business recognizes a loss or gain upon the sale or exchange of cryptocurrency
- Your business pays contractors or employees with cryptocurrency (usually in the form of supplemental income)
Once you determine whether the crypto transactions your business engaged in are taxable, you can use your records to establish a cash basis (the real market value of the currency once it was earned as income or sold as property) and continue to file taxes as usual.
The upside here is that the hardest part of accounting for crypto and tax returns is establishing whether the transaction is considered taxable income or property. There aren’t any other special rules or rates regarding how cryptocurrency is taxed.
IRS Notice 2014-21 expounds on the definition of virtual currencies and how they are taxed if you’re interested in reading further.
As always, check with a tax professional or accountant when filing taxes for your business. Even if you are among the staunchest of DIY returners, it pays to get a professional’s assistance when it comes to taxes.
What Does The IRS Count As Virtual Currency?
All cryptocurrency is virtual currency, but not all virtual currency is cryptocurrency. According to the IRS:
Virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, and a medium of exchange. Some virtual currencies are convertible, which means that they have an equivalent value in real currency or act as a substitute for real currency.
So virtual currency doesn’t need to have a direct USD value or correlation to be considered virtual currency. However, that distinction won’t matter for businesses engaging in cryptocurrency transactions.
As cryptocurrency is a type of convertible virtual currency, it does have a value that can be represented by USD. This is true even when the USD value changes, as cryptocurrency tends to be quite volatile.
Today, over 5,000 different cryptocurrency coins and tokens are on the market. Here’s a look at some of the most popular cryptocurrencies:
- USD Coin
- Binance Coin
If you plan on introducing cryptocurrency payments for your business, you’ll need to invest in a cryptocurrency payment gateway to accept and transfer payments from different kinds of virtual currency.
If you’re unsure where to start, check out our guide: The 5 Most Popular Crypto Payment Gateway & Processors.
When To Report Bitcoin & Crypto Transactions On Taxes
You should report Bitcoin and crypto transactions, if:
- You Spent, Sold, Or Exchanged Virtual Currency: You will recognize a capital gain or loss that should be reported on Form 8949 and Form 1040.
- You Or Your Business Gifts Or Were Gifted Cryptocurrency: You will need to report these on your taxes IF the amount gifted exceeds the gift limits, which is $15,000 for 2021 and will be $16,000 in 2022.
- Your Business Received Cryptocurrency Payments: Payments, traditional and cryptocurrency, should be recorded as earned income for your business. Business income must be reported to the IRS.
- You Are Self-Employed & Received Cryptocurrency Payments: When you receive income as a freelancer, you must report your income if you make over $600 in payments for goods sold or services rendered, whether those payments are in cryptocurrency or fiat money.
- Your Business Paid An Employee Or Contractor With Cryptocurrency: If your business paid an employee or contractor via cryptocurrency, the income would need to be reported on W-2 and 1099 Forms, respectively. The payments should also be reported on your business’s payroll tax returns.
Crypto Transactions That Are Taxed
Most crypto transactions are taxed, but the transactions fall under broad categories, so the rules are pretty easy to understand. Here’s a look at taxable crypto transactions:
- Crypto sales or exchanges in which a loss or gain is recognized
- Cryptocurrency received as payments for services rendered or goods sold
- Cryptocurrency gifts exceeding $15,000 in value during the 2021 tax year
- Earning cryptocurrency by cryptocurrency mining
- Cryptocurrency spending
Crypto Transactions That Aren’t Taxed
There are a few common situations in which crypto transactions aren’t taxed. Here’s a breakdown of nontaxable crypto transactions:
- Cryptocurrency wallet transfers
- Cryptocurrency received as a bona fide gift (within taxable limits)
- Gifting cryptocurrency to someone else
- Cryptocurrency donations to tax-exempt charities or nonprofits
- Cryptocurrency purchased with fiat or physical money and held
How To Record Crypto In Your Accounting Software
Your business’s crypto transactions translate to income earned or assets gained or lost.
Despite the currency’s unique form, crypto still plays a role in your business’s cash flow in the same way traditional money does. So any crypto transactions should be afforded a place in your business’s general ledger.
Fortunately, the accounting rules remain the same for crypto transactions. The only substantial difference is that you’ll need to keep diligent records regarding the cryptocurrency’s value whenever it is exchanged or transacted.
If you use accounting software to track and manage your company’s books, it’s a good idea to record cryptocurrency transactions within the software, too. That way, all your records are in one place.
However, most traditional accounting software isn’t designed to accommodate crypto transactions, so you may have to do some more manual input than you’re used to.
Otherwise, recording cryptocurrency payments in your accounting software is relatively simple. Here are the basics of how to record cryptocurrency transactions in your accounting software:
- Create An Account For Crypto Transactions: Create an account named “Crypto Transactions” or something similar within your accounting software. That’s where you’ll be recording all your business’s crypto transactions.
- When You Are Paid With Crypto, Establish A Cash Basis: When your business gets paid with, buys, or spends cryptocurrency, you’ll need to establish a cash basis or USD value for the cryptocurrency at the time when you received it. So if you receive a cryptocurrency payment worth $200 at the time of receipt, then $200 is your cash basis for the payment.
- Debit/Credit the Crypto Payment: Once you have established a cash basis for your crypto transaction, you can enter the transaction into your accounting software under your “Crypto Transactions” account. For example, if you are paid with crypto, you would debit the payment from your Crypto Transactions account and credit the amount to your general ledger’s asset column.
If your business spends, trades, mines, or sells cryptocurrency, the same general credit and debiting apply. However, the process gets a bit murkier as the transactions get more complex.
It’s best to consult a tax professional or accountant when it comes to recording cryptocurrency transactions. It’s easy to make a mistake when recording the transactions, which could have far-reaching tax implications, so leaving it to the professionals can provide you with some accounting peace of mind.
Should You Use Crypto Accounting Software?
Crypto accounting software is specialized software designed to simplify and automate cryptocurrency accounting and tax reporting.
The best crypto accounting software features include automated crypto transaction recording, prepopulated tax forms, and track gains and losses.
Most crypto accounting software integrates with traditional accounting software and ERPs, so you can keep your records unified and up to date while saving time and energy.
However, investing in new software can be costly and time-consuming. It can also be challenging to determine when adding crypto accounting software makes sense. Businesses frequently paid in, spending, trading, or mining cryptocurrency should consider cryptocurrency accounting software or integration.
If you are losing hours each month trying to keep up with your business’s crypto transactions by manually inputting them, it may be time to add in some automation. Before making a final decision, you should discuss crypto accounting software with your business’s accountant or tax professional. They can advise you on whether investing in the software is a solid move and may even have some software suggestions.
There are plenty of options on the market if you are heavily considering implementing crypto accounting software. Here are some of the most popular cryptocurrency accounting software options:
- QuickBooks Online (with Gilded or BitPay integrations)
- Xero with integrations
- CryptoTrader.Tax by Coin Ledger
What Accounting Records Do You Need To Keep On Cryptocurrency Transactions?
According to the Internal Revenue Code, you should keep the following cryptocurrency records:
- The fair market value of the virtual currency (on receipt and when transacted)
- Holding period length
- Date received
- Type of cryptocurrency
- Any other records providing proof of exchange or transaction
The Bottom Line On Crypto Accounting & Taxes
Businesses should keep accurate and detailed records when handling cryptocurrency. The upside here is that outside of tracking the value of cryptocurrency when it is received, sold, exchanged, or spent, the tax rules regarding cryptocurrency aren’t that much different from traditional tax and accounting rules.
As long as your books are detailed and all records are kept up to date, you should be fine come tax time.
However, that’s assuming you are working with a tax or accounting professional. Their guidance will help prevent errors when submitting tax returns and help you better understand what records you should be keeping when using crypto.
The reason we recommend working with a tax or accounting professional is simple. Taxes and accounting are tricky enough without adding confusing crypto accounting regulations. Letting the professionals handle it is simpler, faster, and less expensive in the long run, especially if you end up with penalties for incorrect reporting.
For more information on cryptocurrency, read our articles:
- What You Need To Know About Accepting Bitcoin & Other Cryptocurrency Payments
- The 5 Most Popular Crypto Payment Gateways & Processors