Are you developing in the cryptocurrency industry? If so, chances are you are concerned about your accounting and back-office operations. Crypto accounting is undoubtedly challenging. But don’t worry. This article will ensure you’re aware of the typical errors made in crypto accounting—so you can avoid costly penalties. Let’s dive in!
What is Crypto Accounting?
Crypto accounting is the process of reflecting the transactions your company makes on its general ledger. It’s distinct from cash transactions and requires you to follow the rules of generally accepted accounting principles (GAAP). With crypto, you must document it at cost rather than at its current market value.
But if the value of the cryptocurrency decreases, you’ll have to record a loss. On the other hand, you won’t report a “profit” until the cryptocurrency is purchased or sold. On the surface, this can seem a bit confusing. But following the principles of GAAP is essential to getting your crypto accounting in order.
6 Common Mistakes to Avoid in Crypto Accounting
Filing incorrect crypto taxes could mean a whole lot of trouble and hefty fines for your business. To help you avoid any unpleasant surprises, let’s take a look at 6 of the most common crypto accounting mistakes.
- Incorrectly Treating & Recording of Crypto
One of the most common mistakes made with cryptocurrency accounting is treating it like a currency instead of property. Although digital, the Internal Revenue Service (IRS) views it as property, meaning that when filing your tax returns, the rules and regulations for property transactions apply.
This means that when dealing with cryptocurrency, you need to be prepared to pay capital gains taxes as opposed to currency-specific taxes. It’s essential to be aware of the differences to stay on top of your accounting.
- Incorrectly Calculating the Cost Basis
Trying to figure out the cost basis of your cryptocurrency can be tricky. Always remember: it’s based on the date when you first purchased it. Plus, you need to include all information about that initial purchase, like if you bought bitcoin in 2017 and then traded it on other exchanges.
It’s important to double-check your assets and stick to the FIFO principle (first in, first out). And don’t forget to keep detailed records of all sales and transfers. Every cryptocurrency transaction is a taxable event, so it’s vital to have all the information on hand.
- Not Checking All Wallets and Exchanges
If you are like most people and use multiple wallets and exchanges, it can be tricky to figure out your cost basis for taxes. That’s because the cost basis can vary depending on the assets held in those accounts.
Fortunately, using all of your wallets and exchanges can help you take advantage of the long-term capital gains tax rates. So, if you have multiple accounts, ensure they are all connected to get the most out of your tax situation.
- Ignoring Accounting of Transfer Fees
A cryptocurrency asset’s sale price can be separated from trading costs for accounting purposes. However, the most straightforward strategy to deal with transfer fees is to lower your holdings by the transfer fee amount while maintaining the same value.
Still, feeling daunted by the process? You can use crypto accounting software or get advice from professional accountants to ensure your fees are accounted for correctly.
- Not Categorizing Transactions
If you’re dealing with an Ethereum outbound transaction, it pays to keep track of all the subsequent transactions and events. This is because categorizing and properly reporting any losses related to those transactions could result in a tax write-off, giving you the opportunity to save some money.
Therefore, staying organized and categorizing your transactions is crucial to avoid bookkeeping errors. Also, don’t forget to link your invoices to the relevant transactions and use categories or memos to spot related transactions quickly.
- Not Considering Freebies
Receiving free Bitcoin through forks, chain splits, or airdrops may sound tempting. But don’t forget about the taxman! Failing to identify cryptocurrency gained through airdrops and forks as such can lead to you being taxed at a much higher rate than usual.
It pays to stay informed – many traders simply don’t track their fork or airdrop windfalls and end up paying more than necessary. So if you’re lucky enough to get some free Bitcoin through one of these methods, keep track of it!
Crypto accounting is no walk in the park. Its anonymous and encrypted features make it naturally complex and difficult to fathom. Even the most seasoned accounting specialists can make simple mistakes when existing accounting rules are combined with the complexities of cryptocurrency.
You can take assistance from crypto accounting services to make your life easy. Moreover, crypto accounting software can also help you automate the process and ensure your crypto accounts are up-to-date and accurate. Don’t fall victim to common mistakes mentioned here by maintaining your accounts in an efficient, correct, and structured manner.